Did you know that you can generate rewards on your crypto while simply holding them in your wallet for a specific time?
Staking and crypto savings accounts are hot right now. And with the expected release of Ethereum 2.0 in June, staking will become even more popular.
But what is staking, how is it different from cryptocurrency mining, and what coins can you hold to earn a passive income?
What Are Proof-of-Work (PoW), Proof-of-Stake (PoS), and Consensus Algorithms?
Let’s start with the basics to understand our topic.
Staking is the method used to validate blocks in blockchain networks that utilize the Proof-of-Stake (PoS) consensus mechanism. In blockchain networks, consensus algorithms are responsible for reaching a general agreement between participants.
The most popular consensus mechanism, Proof-of-Work (PoW), requires block validators (miners) to use their computational power to solve complex mathematical puzzles to maintain the network, validate transactions, and add new blocks to the distributed ledger.
While the PoW algorithm is the longest-used consensus mechanism among decentralized networks, it has some inefficiencies, which led to the creation of alternative blockchain consensus algorithms. One of them is the Proof-of-Stake (PoS) consensus mechanism that replaces mining with staking coins.
As a result, the PoS consensus mechanism consumes significantly less energy while providing a high level of security and scalability for the blockchain network.
What Is Staking?
In blockchain networks utilizing the Proof-of-Stake (PoS) consensus algorithm, staking refers to the process where validators lock up a certain amount of coins for a specific time to validate blocks.
Instead of mining, the stakeholders forge new coins in PoS networks. Upon successfully validating a block, they are rewarded with transaction fees.
The PoS model uses a pseudo-random election process to select who validates the next block using different factors to choose the validators, including:
● The size of the stake: With this method, the network selects the validator based on the amount of staked coins. The more coins you stake, the higher the chance you get selected to validate the next block. For example, if you lock up 50% of the total coins staked in the network, you have a 50% chance of being selected for block validation.
● Staking age: Validators in PoS networks could also be chosen based on how long they have been staking their digital assets. The longer you have been locking up your coins, the higher your chance of becoming a block validator. However, upon successfully validating a block, the network will readjust your staking age to zero.
● Randomization: This selection formula aims to select the block validator with the lowest hash value and the highest stake.
In addition to these selection methods, some PoS blockchains use a combination of these formulas or utilize a unique approach to choose block validators. Unlike with the PoW algorithm, PoS validators do not have to purchase expensive mining rigs (e.g., ASICs) to participate in the network.
However, stakeholders in PoS networks still have to set up and maintain validator nodes, which requires them to operate a capable device – which could be as simple as a Raspberry Pi – to get selected as a validator.
That said, you don’t necessarily have to operate a validator node to stake your cryptocurrency as some wallets, services, and pools allow users to earn a passive income on their coins without continuously running a device.
It’s also important to note that you can also stake your coins in blockchain networks that use a consensus algorithm based on (or similar to) PoS, such as Delegated Proof-of-Stake (DPoS), Liquid Proof-of-Stake (LPoS), Delegated Byzantine Fault Tolerance (dBFT).
What Are Staking Pools?
While staking crypto is a great way to earn a passive income, being a stakeholder in a PoS network doesn’t necessarily guarantee that you will be selected as a validator and earn rewards for locking up your digital assets.
Similarly to what miners do in PoW blockchains with mining pools, stakeholders have formed staking pools to unite their “staking power” to have a better chance at getting selected to validate blocks (so better chance for earning rewards).
While some staking pools require users to lock up their coins in a third-party wallet, other pools allow stakeholders to hold the digital assets they want to use for staking in their personal wallets.
Furthermore, cold staking pools allow users to contribute their staking power while holding their coins in a hardware wallet, which is considered as the most secure option for cryptocurrency storage.
With staking pools, users can earn a predictable passive income with more frequent payouts, and without the requirement of implementing and maintaining a validator node.
On the flip side, stakeholders will earn less with every successful block validation as the rewards are split among the pool’s participants. Also, some staking pools charge fees for their services, which could also reduce the Return on Investment (ROI) for stakeholders.
What Are the Benefits of Staking?
● A good way to earn passive income: Staking offers a decent way for crypto enthusiasts to generate a passive income while holding coins. Also, with staking, you earn returns on your digital assets while supporting the coin’s ecosystem.
● It’s easy to get started: Compared to mining, there are a lot less resources required to start out with staking. The simplest methods allow users to stake crypto by simply funding their wallets and locking up a part of their digital assets. As a bonus benefit of these methods, you don’t need any technical skills to start staking crypto.
● No to minimal startup costs: To start staking cryptocurrency, you don’t need to purchase expensive hardware (e.g., ASICs) to maintain the network and earn a passive income. While the simplest methods only require a wallet and a specific amount of coins to get started, you only need a simple device (e.g., a Raspberry Pi) to stake coins via operating a validator node.
● Low energy-consumption: Unlike PoW mining, staking in PoS blockchain networks consumes very small amounts of energy. Therefore, you don’t have to take electricity costs into account to calculate your staking ROI.
● Reduced risks of 51% attacks: One of the biggest fears of PoW miners is the threat of 51% attacks where malicious parties use their computing power to take over the majority of the network. As attackers have to acquire 51% of the circulating supply of a coin and they lose a part of their entire stake when the network detects fraudulent behavior, the chances for a successful attack are minimal in PoS systems.
What Are the Downsides of Staking Crypto?
● You can’t interact with your coins: While your coins are locked in your wallet, you can’t transact or sell them for a specific time. Therefore, if the market takes a significant downturn, you won’t be able to exchange your staked crypto for reducing your losses.
● Increased risks with small market cap coins: As you can’t interact with your coins while they are locked up in your wallet, they may be subject to inflation. Since cryptocurrencies with small market caps are more susceptible to excessive price swings than major digital assets (e.g., BTC, ETH, XRP), there is a higher risk of inflation involved.
Which Coins Can I Stake?
Now that you know the essentials about staking let’s see some examples of digital assets you can stake.
With a market capitalization of over $2 billion, Tezos aims to fix the governance flaws of blockchain networks by allowing stakeholders to vote on network changes that are implemented automatically if enough votes are received.
Mostly known for raising $232 million in July 2017 during its Initial Coin Offering (ICO), Tezos uses a variant of the PoS consensus mechanism; Liquid Proof-of-Stake (LPoS).
The staking calculator and analysis website Staking Rewards considers Tezos as one of the most stable cryptocurrencies to lock up in your wallet.
You can earn an annual reward of nearly 5.7% by staking XTZ.
QTUM combines smart contract functionality with a high level of security to operate an enterprise-ready blockchain platform.
With the QTUM’s PoS blockchain algorithm, you can become a stakeholder in the cryptocurrency’s ecosystem.
According to Staking Rewards, QTUM is a safe digital asset to stake, and you can earn an annual 6.22% interest on the coins you lock up in your wallet.
The blockchain project that has the goal to decentralize the web utilizes the Delegated Proof-of-Stake (DPoS) model to reach a consensus within the network.
With a moderate risk rating, crypto users can stake TRX with an annual reward rate of 3.34%.
Also known as the “Ethereum of China,” the NEO blockchain aims to form a smart economy by using the combination of cryptocurrency, digital identity, and smart contracts.
NEO utilizes the Delegated Byzantine Fault Tolerance (dBFT) consensus algorithm, which also allows users to stake the cryptocurrency.
Staking Rewards classifies NEO as both a very stable and easy coin to stake with an annual reward rate of 1.71%.
EOS is a highly scalable smart contract platform that has raised a record amount of funds ($4 billion) during its year-long token sale between June 2017 and June 2018.
Like TRON, EOS features the DPoS consensus algorithm, so you can stake the cryptocurrency to generate an ROI on your coins.
With a moderate risk rate, you can earn 1.74% on your stake coins in a year with EOS.
Coming Soon: Ethereum (ETH)
While Ethereum still uses the Proof-of-Work algorithm to reach consensus, the blockchain network is going through a major upgrade this month, in which it will transition to the PoS model.
When June’s Ethereum 2.0 upgrade occurs, cryptocurrency users will be able to stake ETH.
While the minimum amount of coins required to become a validator in the blockchain system is 32 ETH, stakeholders could earn ludicrous rewards (11.01%) every year for staking Ethereum.
Coming Soon: AAX Token (AAB)
Although the coin is not used for staking, soon it will be possible to lock your AAB up in a savings account and benefit from a high interest rate.
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