What Is Crypto Staking: Understand This New Technology | by Dark Web Link | The Capital | May, 2021
The year 2021 has given proof that it is the year of cryptocurrencies. Crypto coins like Bitcoin (BTC) and Ethereum (ETH) have been continuously reaching all-time highs. The large institutions are also actively taking part in this. In the current volatile situation, it becomes of utmost importance to understand the terminology, and additionally, how these technologies actually work.
Crypto staking (abbreviated from cryptocurrency staking) has been a widely misunderstood term from the crypto dictionary. Many people assume that this new trend is quite easy and is one of the easiest ways to earn money (crypto) with the already owned supply. In this context, a few questions arise, such as — what is going on in the crypto market? Is it free, or are there any risks?
In this article, we will deliver compact information on what crypto staking is, its implications, and future possibilities. Additionally, we will also let you know how you can begin to stake cryptocurrencies all by yourself.
Cryptocurrency staking refers to the process of storing crypto coins in a cryptocurrency wallet to get an opportunity to validate transactions in a block. While staking crypto, the individual also receives a reward. However, this feature is only available with those cryptocurrencies that run on the Proof-of-Stake or PoS or any other similar algorithms. Crypto staking achieves a variety of outcomes such as validating network transactions, extending loans, gaining new crypto tokens, or earning interest (also known as yield farming) as the reward.
In the case of such currencies, staking replaces the mining mechanism. As a result, the validators, also known as the forgers in PoS-based blockchains, work as miners.
Crypto staking is most widely used in Ethereum (ETH) and decentralized finance (DeFi) protocols. With time, cryptocurrency staking is growing in popularity despite being innovative yet risky. It helps in passive income just as the interest concept does in the traditional finance of an investment. It is also aiding in the opening up of new cryptocurrency markets and financing the latest projects.
The methodology of staking permits the PoS blockchain to run tirelessly. It locks by permitting the validators or the users to lock their coins (stake) so that the system can randomly choose to produce a block. The staked amount and the reward are directly connected. This means, the higher the amount of the stake, the higher will be the chances for a staker being chosen for the next block and hence receive rewards.
Let us make it simpler with the help of a cryptocurrency that can be staked, Ethereum.
The minimum staking amount for an ETH node is 32 Ethereum. Staker “A” stakes say 64 ETH while staker “B” stakes 32 ETH. As per the rule, Staker A will have twice the chance to be chosen as the next block validator than staker B. However, this does not imply that staker B cannot be chosen owing to the fact that the system selects randomly. In this case, both parties are essential for the smooth and fair running of the network. As a result, both of them need to be adequately incentivized through the block rewards in the form of the native token of the protocol.
It will be difficult to state whether crypto staking is worth it or not. This is due to the fact that all of it depends on how your approach is towards making money. It seems an attractive offer to receive rewards only to store cryptocurrency. However, no one should expect a huge profit from this.
Similar to any other way of making money, cryptocurrency staking also comes with its own advantages and disadvantages that we will discuss in the next segment.
The constant growth of crypto staking is due to the advantages that it bears. Here are the advantages of staking crypto coins:
- Crypto staking is a method of passive income for users. With the commencement of the staking process, it only requires minimal attention.
- It requires low energy consumption and is environment-friendly. Unlike mining, staking requires very little electricity.
- To stake crypto coins, one does not need any specialized skills or knowledge.
- For staking cryptocurrencies, one does not need to invest in very expensive equipment and the bill is usually lower. To get started, a small investment in the purchase is enough. Thus, the threshold for entering this passive income is quite low.
- The PoS algorithm-based cryptos are believed to be much better secured from the 51% attack. This reduces the risk for both the holders and the validators.
As already stated, cryptocurrency staking comes with few drawbacks as well. Here are those.
- One of the biggest risk factors while staking cryptocurrency is probably is the crypto volatility. An increase in the value of a cryptocurrency augments the profit from staking only due to a higher value for the coins. In this case, a bearing trend sees the opposite to happen. Additionally, the losses from the decrease in the value of the stored cryptocurrency can very easily exceed the profit that is made through staking.
- Nevertheless, the noticeable risk of a price drop in the cryptocurrency used for staking keeps the profit margin relatively modest. It never exceeds 15% per annum for the most popular coins.
This being said, crypto staking is a good option for all of them who invest in cryptocurrencies made available for staking. It yields an additional income for them.
As a matter of fact, with the daily changes in the crypto market, it is quite a challenge to recommend any particular coin to be the best crypto staking coins. In all forms, you will have to do your own research to be able to understand what exactly suits you.
However, one of the best platforms that help you make a choice by tracking over 200 available coins for staking is Staking Rewards. Two things that need your consideration if you are planning to stake your cryptocurrencies are –
- Before carrying out cryptocurrency staking, you need to evaluate the crypto coin carefully via fundamental and technical analysis.
- It makes good sense to invest in staking of coins that you are going to invest whatsoever.
Well, here are some of the cryptocurrencies or staking coins lists that are really doing great at this moment on the grounds of staking. However, some of them are unavailable at the moment for staking but if the future persists on their staking, they can be a coin cryptocurrency to choose from.
As Bitcoin (BTC) has gained immense popularity, especially in trading and mining, people are eager to stake Bitcoins. Unfortunately, Bitcoin is based on Proof-of-Work and is unavailable for staking.
Currently, the Ethereum network is in the process of transitioning to the PoS algorithm and that the cryptocurrency can already be staked. The estimated annual reward for staking Ethereum is 7.3% at the time of writing.
Unfortunately, cannot be staked at the moment.
Polkadot, also abbreviated as DOT, is a blockchain interconnection protocol that permits the arbitrary data to get transferred between the blockchains and not solely the crypto assets. The blockchain of the coin is dependent on the Nominated Proof-of-Stake or the NPoS consensus algorithm. Polkadot ranks amongst the Top 10 cryptocurrencies by the market caps. The estimated annual staking reward for Polkadot is 13.13% at the time of writing.
Other popular cryptocurrencies or altcoins that can be staked right at this moment are:
- Algorand (ALGO)
- Cardano (ADA)
- Cosmos (ATOM)
- Solana (SOl)
- Tezos (XTZ)
You can also stake stablecoins that are free from the price volatility. Various platforms are there, both centralized and decentralized in nature. This permits the users to to lock up all their stablecoins and finally earn passive income. Some of the examples of the non-custodial protocols that permit the stablecoin staking are — dYdX and Compound.
There are a couple of terminologies available that are directly or indirectly related to crypto staking that need to be cleared outright in this article. So, here are the majority of them.
The chance of winning the upcoming block for verification and thus receiving the reward directly depends on the number of coins in a user’s wallet. This may be advantageous when one combines into a pool that divides the profit in the same proportion amongst all the participants to the invested share. This kind of staking pool is similar to the traditional mining pools. This method is however convenient for the new validators having a very limited number of coins and if the minimum stake is high enough in this blockchain.
A device that performs crypto staking must be constantly connected to the internet and the crypto network. This increases the chances of getting hacked. However, to solve this problem, a special mechanism has been developed known as “cold staking”. This mechanism depends on a smart contract, which delegates the staking authority into a skiing node. The best part is that the staking nodes are always online but devoid of any private keys. This type of nodes offer resources for the blockchain and stakes in the place of another wallet that cannot spend coins.
One of the first projects that successfully implemented cold staking was Particl Coin. Two other options for cold staking are NavCoin and Stratis.
There are a couple of factors that help in the rise of the crypto staking. All of those are mentioned below:
The heavy explosion of decentralized finance or DeFi has brought to life decentralized trading. The lending platforms like the Compound and Uniswap have permitted users to invest their funds without the requirement for centralized intermediaries. This has earned an outrageous return on investment (ROI). All of these are possible due to the new breed of staking that is of cryptocurrencies known as liquidity mining and yield farming.
The Proof-of-Stake (PoS) is quite a relative term when it comes to the staking of cryptocurrencies. With the growth of the cryptocurrency ecosystem, the PoW-based protocols are falling apart owing to their slow speed, overhead costs that are substantial, and the lack of flexibility. The fact is that it is relatively challenging to run the dApps on the PoW systems.
It can be strongly argued that the PoW blockchains had never been intended to scale to the levels needed by the mass-adopted crypto networks. As a result, the other leading decentralized networks, such as the Ethereum (ETH), have moved from supporting mining with special equipment to staking the PoS protocols.
There are a number of long positions amongst cryptocurrency investors. A few years ago, people were only interested in short-term profits. Now, many are interested in investing in digital currencies for long-term benefits. This is what staking permits in addition to the passive income from the staked digital assets.
This has, however, only strengthened by the continuous bull run. As a result, most of the investors preferred HODL over the sale of their holdings. This leaves them with idle assets that later they could monetize by staking.
Why not stake your cryptocurrency holdings if you are a crypto holder or HODLer? You definitely own some crypto coins. Thus, this is perfect if you stake your cryptos. Until and unless you are actively trading, bearing idle assets is simply a waste of the potential passive income. Additionally, you do not need to purchase any equipment as that of the Proof-of-Work mining operations. The fascinating thing is that anyone can become a cryptocurrency staker. You will never need hoards of money in your bank as required in the traditional finance system.
Also, it is a fact that crypto staking might not be as easy as one may think. It is quite easy to state that you must stake your cryptos in a bull market. This is because your collateralized asset will appreciate in value as well. In this regard, if you stake a more volatile cryptocurrency, or the prices fall owing to the external market conditions. In certain situations, you may grieve your decision as you will lose a significant value by the end of its fixed staking period. Obviously, you can nullify this option by staking the stablecoins.
Additionally, there persist risks of hacks and scams. Cryptocurrency staking requires smart contracts to function accordingly. These are also vulnerable to hacker exploits alongside the exit scams known as the rug pulls. Travelling back to 2020, the DeFi is littered with the exploited protocols that have cost the users hundreds of millions of dollars.
Thus, it is important to carefully do your research and that it must be in-depth. You must stake depending on your risk appetite and what all you can afford. There are chances that you will be fine but you cannot predict beforehand. It is better to stake in reputable and proven cryptocurrency projects. Additionally, it is recommended that you trustworthy platforms for staking. You need to make sure beforehand that the smart contracts have been properly audited. You need to take responsibility for your investments.
Here are the five easy and pretty straight to the point steps that will help you to begin your crypto trading:
The new PoS coins are everywhere. It is making the situation difficult for the investors to choose which coin to go for their staking purpose. It might seem disheartening, but the fact is that good research on the coins and their current market conditions are deliberately required. You need to make sure you are knowledgeable enough about the potential coins and their rewards.
For staking your cryptocurrencies, you will have to prepare any of the wallets — hardware/cold wallet or software/hot wallet. This wallet will help you to store your staked cryptocurrencies and the earning rewards. Nevertheless, if you utilize some centralized platforms that control your assets, you will not need to.
Some projects like the Cardano (ADA) and Cosmos (ATOM) bear no minimum threshold for staking. But, for staking Ethereum, you have to invest 32 ETH. make sure that you have the available funds to continue staking in the cryptocurrency.
For staking your cryptocurrencies, you are required to act as a validator node. This requires that you have a strong machine that is connected to the internet continuously all the time. A normal desktop of yours will suffice but bear in the mind the electricity costs. You can also use cloud computing via virtual private servers.
After you have chosen your coin to stake, created a wallet, and have transferred at least the minimum threshold for the coins followed by the right hardware setup, you must proceed to follow the instructions of the staking software. Keep your device connected. You are now earning passive crypto.
As you can hold your coins on Binance, You can even add them to a staking pool. Nevertheless, there are no fees for Binance staking. Additionally, you can also enjoy the other benefits that you receive on holding your coins on the Binance platform. All you need to do is hold the PoS coins on Binance. All your further technical requirements will be automatically taken care of. You can expect the staking rewards at the beginning of each month. You can also check the earlier distributed rewards for a specific coin under the “Historical Yield” tab on the individual crypto staking page on each project.
There are no easy methods that can explain how cryptocurrency staking rewards are calculated. However, each of the blockchain networks might use a different way of calculating the staking rewards.
Some get adjusted on a block-by-block basis depending on several factors, which may include:
- The number of coins the validator is staking.
- The tenure for which the validator has been actively staking.
- Total number of coins that are staked on the network.
- The inflation rate
- Other concerning factors.
In some of the other cases and for the other networks, the staking rewards get determined as the fixed percentage. The earned rewards are distributed amongst the validators as a sort of compensation against inflation. Inflation encourages the users to spend their cryptocurrencies in place of holding them. This may increase their usage as cryptocurrency. However, with this model, the validators can calculate what exact staking reward they can expect.
To conclude, crypto staking is a brand new activity that has successfully revolutionized the face of cryptocurrencies. It has offered a compelling fresh new use case. As the PoS networks continue to grow in influence, so will be the crypto staking mechanism. These are crucial tools for strengthening the networks, building vested communities, and enabling the new business models. They are also particularly useful in the consumer or utility token models. Furthermore, this resolves the medium of exchange velocity issue while offering true utility value.
Disclaimer: Read the complete disclaimer here.