What is staking in cryptocurrency?
Let’s Define Staking
Crypto staking can be likened to depositing your money in a bank. It simply means locking up your assets in exchange for rewards or interest. In other words, staking is when you commit your crypto assets in order to support a blockchain network and confirm transactions. Crypto staking is common with cryptocurrencies that use the proof of stake model to process payments.
When you stake your crypto, it simply means you have the opportunity to generate passive income depending on the rewards or interest rates offered by the cryptocurrency. The crypto staking rewards available to you when you stake varies between the cryptocurrency you stake or other types of cryptocurrencies, depending on what is being offered as a reward.
How Does It Work?
The proof of stake model which supports staking is better than its proof of work model because it consumes less energy and handles a higher number of transactions. People who stake will pledge their coins assets to a specific cryptocurrency protocol and the protocol, in turn, will choose validators from the participants to confirm blocks of the transactions. To earn crypto staking rewards on your staking, the more you stake, the higher your chances of being chosen for a reward.
When you stake, a block is added to the blockchain and new cryptocurrency coins are minted and distributed as staking rewards. The rewards are usually the same cryptocurrency used in staking except for some blockchains that use different cryptocurrencies as crypto staking rewards. You can stake your coins on various crypto exchanges and you can only stake cryptocurrencies that use the proof of stake model.
During the staking period, your crypto asset is still your own and you can un-stake them anytime you want to trade. However, the un-staking process may not be immediate because you are expected to stake your coins for a minimum period.
What Is Proof Of Stake?
Proof of stake is a type of blockchain protocol that uses consensus mechanisms that work by choosing validators in proportion to their quantity of holdings in the associated cryptocurrency. Proof of stake is known to require less energy consumption which makes it preferable to the proof of work protocol. Today, the biggest proof of stake cryptocurrency in terms of market capitalization is Cardano.
What Is Delegated Proof Of Stake?
The delegated proof of stake protocol is usually referred to as the advanced proof of stake protocol. In this protocol, users of the network are given the opportunity to elect the next delegates to validate the next block. The delegates are also referred to as block producers or witnesses.
Voting is done by pooling your tokens into a staking pool and linking it to a particular delegate. Your token is not transferred into another wallet but rather a staking pool service provider helps you stake your assets in a staking pool. Most protocols choose between 20 and 100 delegates for each new block. This is to ensure that delegates of one block may not be delegates of the next block. The elected delegates receive the transaction fees from the validated block and the crypto staking rewards are shared among the users of the network that pooled their assets in the successful delegates’ pool.
What Is A Staking Pool?
A staking pool is a platform that allows multiple stakeholders to combine their computational resources so as to increase their chances of being rewarded. Their staking power is combined to verify and validate new blocks so they can win crypto staking rewards. Staking pools are only available on blockchains with proof of stake protocols or non-proof of stake protocols through protocols design features.
What Is Cold Staking?
Cold staking involves staking your crypto assets that are stored offline in a hardware wallet. The main reason is for reliable security because hardware wallets are more difficult to hack than web-based wallets. This means that you have to keep your assets in a designated offline wallet to earn your reward. Once you move it to a new address, you will lose the staking reward.
Coins You Can Stake
There are thousands of cryptocurrencies in the crypto space that you can stake and earn rewards. Here are some of the coins you can stake and earn passive income:
TEZOS — In the Tezos community, staking is referred to as baking. Tezos has a delegated proof of stake consensus mechanism. Most Tezos wallets support delegating, which means you only have to transfer your funds into a wallet and delegate it to a ‘baker’. You can delegate through popular crypto exchanges like Coinbase, Binance, or KuCoin.
The value of a staked Tezos is put at 78% of the market cap. This means that for every $1,000 you stake, you may get an annual reward of $78.Cardano — The proof of stake algorithm for Cardano is known as Ouroboros and it divides time into epochs that contain 21,600 slots.
The rewards of staking a Cardano coin are divided between the input endorsers, multiparty computation stakeholders, and slot leaders. Staking Cardano is likely to give you an average of 13% yearly returns.Polkadot — Polkadot employs a delegated proof of stake protocol that allows a voting system that engages a large part of the community by granting Polkadot holders voting right proportional to their stake.
To become a voter, a Polkadot holder must lock their coins up for at least the enactment delay period beyond the end of the referendum. Polkadot staking validators are there to validate transactions and the nominators pick the validators. A nominator can attribute his stake up to 16 validators he trusts and will earn crypto staking rewards based on their activities. Polakdot has an annual reward rate of up to 13.5%.Algorand — Algorand functions as a proof of stake protocol that can process up to 1,000 transactions per second.
The Algorand proof of stake mechanism employs either the participant node or relay node. To create a block, 1,000 nodes are chosen to produce a new block.
The annual reward for staking Algorand is put at 5.52%Dash — Dash is one of the pioneers of the proof of stake consensus mechanism. It does not really operate as a proof of stake but its master nodes work like that if a proof of stake protocol and it is lucrative to stake. Staking a Dash will earn you a 7.5% annual return.Cosmos — The Cosmos blockchain accommodates the blockchain of others, especially that of startup businesses. The annual return for staking Cosmos is 8%.
Crypto Staking Rewards And How They Are Calculated
Staking rewards are usually reset on most blockchain platforms. Most blockchains have a fixed annual rate used in calculating your reward. Crypto staking rewards most times are in form of the cryptocurrency staked or other types of cryptocurrency offered by the blockchain. The rewards are calculated based on the amount of the cryptocurrency you stake in the designated wallet with a principle of the more you hold, the higher your reward. The reward rates used in calculating your total reward are most times fixed but can change depending on factors like the network’s protocol, validator performance, inflation rates, number of stakers, and savings rate set by the network.
Staking is a way of making passive income on your cryptocurrency and it is not without some inherent risks. Some of the risks of staking include:
Market Volatility — The market volatility of crypto assets is an apparent inherent risk that makes investors lose on their investment.
If you stake a crypto coin with an annual interest rate of 10% but the value of the asset drops by 40%, you will make a loss on investment in the asset.Lock-up Period — Some of the cryptocurrencies you stake require a minimum lock-up period in which you won’t be able to access your asset. If the price of your crypto asset dips in value during the lock-up period. You will not be able to access it and trade which will affect your investment.
Rewards Duration — Some of the cryptos do not pay out staking rewards daily. Stakers will have to wait to receive their reward. This may reduce the period in which you can re-invest your staking rewards to earn more.Project Failure — Before investing in any crypto, ensure you research the fundamentals and technology of the network in order to understand the risk around investing in the network.
There is every possibility that the network you invest in crashes and goes out of business and you will lose your staked coins.Theft or Loss — There is also the risk of security where you can lose your private keys or your wallet is hacked and your funds are stolen. Ensure you back up your wallet and keep your private keys safely.
Difference Between Mining and Staking