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Staking On The Internet Computer: NNS, Neurons, & Staking


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What Is Staking In The Traditional Crypto Sense?

Staking is a popular term in the cryptocurrency and DeFi lexicon, but it has multiple meanings. First, in the financial sense, and from an investor’s point of view, it’s locking money into a blockchain network and receiving rewards, which can be in the form of a specific cryptocurrency or voting and governance rights. In simple terms, staking is a way of earning rewards by holding certain cryptocurrencies, mainly Proof-of-Stake (PoS) coins, and can be viewed as similar to an interest-earning bank savings account.

Second, staking refers to validating a network and keeping the network alive, such as in Proof-of-Stake staking. In this circumstance, a coin holder will stake their coins and the blockchain will put them to work. However, this only works for PoS coins. This is because their consensus mechanism is based on staking, rather than Proof-of-Work.

(Proof-of-Work versus Proof-of-Stake, the two powerhouse blockchain consensus mechanisms.)

In Proof-of-Work, network operators are called miners, not validators. This is because they mine Bitcoin by operating computer hardware that solves mathematical puzzles, and in reward for this service, the miners are given BTC. In the PoS sense, these network operators are called validators, and their stake in the network is what validates the transactions and keeps the blockchain network running. In reality, this is the primary need and importance of staking. Metaphorically speaking, it’s the “blood” that keeps the body’s organs running and healthy. If there’s no stake, then the network will slowly die out.

However, every blockchain is different. For example, when Ethereum transitions to Ethereum 2.0, the staking mechanism will be similar to the above situation just described, but in other blockchains, the protocol may not have this exact same staking mechanism.

For example, instead of a blockchain’s native cryptocurrency, some projects reward governance tokens to the network’s staking participants, and these governance tokens give stakers a say or vote in future changes and upgrades to the blockchain’s protocol.

Background To The Internet Computer’s Consensus Model

Blockchains traditionally have used permissioned or permissionless consensus mechanisms, with Bitcoin and Ethereum v1 using permissionless ones, which are satisfactory in decentralized terms, but perform less-well in efficiency. To combat these setbacks, the Internet Computer uses a hybrid model, which means it can obtain the efficiency of a permissioned protocol while offering the benefits of a decentralized PoS protocol. The IC’s hybrid model is called a “DAO-controlled network.” This metaphorically speaking DAO is called the Network Nervous System (NNS), and it’s based on PoS, which means all decisions made by the NNS (the network’s government) are made by the community members whose voting power is determined by how much of the network’s governance token (ICP) they have staked in the NNS.

Staking On The Internet Computer

In the case of the Internet Computer, staking is the primary means by which stakeholders participate in the voting on proposals that are used to change the nature and operation of the network. So every time an action happens that may alter the Internet Computer network, like bringing in new computers to the network, new subnetworks online, and changes in tokenomics, these are submitted as proposals to the network. Then these proposals get voted on, the votes are counted by the stakeholders, and the majority wins. So stakeholders are needed to have an influence over the Internet Computer’s future and how the network evolves. Hence, people who lock their ICP into the network gain voting power and influence over proposals.

In compensation for locking up ICP in this way, the network generates rewards. Currently, the maximum rewards for staking ICP tokens is 20.8%. However, this is over an 8 year timeframe, so as the timeframe shortens, the rewards become smaller. So those investors who truly believe in the Internet Computer’s technology and innovation will significantly benefit from staking long-term in the network.

Technically speaking, a person’s stake is the amount of ICP held in a neuron’s account. The stake can be increased at any time, but withdrawal requires that certain conditions be met, mainly when the dissolve time delay has passed. So similar to staking on other blockchains, it’s required that a stakeholder invests their tokens for a certain period of time.

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(The Internet Computer dashboard, under the Governance section, shows the amount of voting and staking rewards an investor or stakeholder can earn from staking their ICP on the network. We can see from the numbers that the network is quite active, and the rewards are pretty decent, where investors earn on average over 1 ICP per day on their stakes.)

What Is A Neuron?

A neuron is a special type of account where stakeholders can stake their ICP. By definition, “it’s a ledger account controlled by the Governance canister.” Running on the Internet Computer is the Network Nervous System (NNS), which is responsible for shuffling through all the proposals and enacting changes that they represent. It keeps a ledger account which has all the accounts, as well as the ICP tokens in those accounts.

How Does This Work?

To stake ICP on the Internet Computer, users must go to the NNS dApp and transfer ICP to the account. On the NNS dApp, users can do more than just stake. For example, they can create and manage neurons, vote on proposals, and create canisters on the Internet Computer. It’s almost like the “desktop” that has the individual applications on its homepage that users can open and engage with.

But to actually stake on IC, the individual needs neurons. Neurons are required to participate in governance and earn rewards, and to create a neuron, users must lock up ICP tokens for a period of time (as mentioned above). The minimum stake required to create a neuron is 1 ICP token (equivalent roughly to $15). After this, stakers can configure the staking timeframe from 6 months to 8 years.

Conclusion

There are more details regarding timeframes, adding neurons, and dissolving them, but for general stakers, this general overview should suffice. In summary, after a user stakes ICP and creates a neuron, they’re free to vote on proposals or follow other governance actions happening on the regular. Also, they can sit back and relax, enjoy their long-term investment, and make contributions to the network that best advantages their investment and the greater Internet Computer ecosystem. The Internet Computer staking mechanism is a stable system with much promise.

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All About The Internet Computer
All About The Internet Computer

This blog is dedicated to exploring the Internet Computer's tech stack, how it compares to the industry, projects building on the Internet Computer, and what ways the Internet Computer is creating true Web3.

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