crypto-staking-explained

Crypto Staking Explained

Staking involves locking up specific cryptocurrencies in an address and, in return earning rewards. Therefore, by controlling and locking the crypto, an investor has a share or stake of the token supply.

You may ask, ‘Why earn rewards for staking cryptocurrencies?’ Simple – the crypto you hold and lock up is put to work in the blockchain, often to verify transactions on the network. Not all cryptocurrencies support staking models for verifying transactions. As such, network participants can only earn rewards for staking digital currencies that support the model. Let’s take a look at how staking works.

Understanding the Proof-of-Stake

Beyond what is commonly known that traders and investors earn incentives for staking specific cryptocurrencies, this mechanism is the life and blood of some blockchain environments. Staking works to decentralize operations of the blockchains through its consensus mechanism for verifying transactions called Proof-of-Stake (PoS). Interested crypto holders may choose to stake their tokens to participate in verifying transactions and securing the network.

When blockchain technology launched in 2009, with Bitcoin (BTC) as the first-ever cryptocurrency, transactions on the network were (and still are) approved through mining. This process involves network participants solving complex mathematical equations using computing power. Known as Proof-of-Work (PoW), this consensus mechanism for creating new blocks of transactions is highly energy-intensive.

While PoW gets the job done to ensure the network is decentralized and transactions are secure, one may have asked if there is a more efficient way to handle blockchain transactions. Enter PoS – a consensus mechanism that allows participants to lock up their digital assets and randomly selects users to validate blocks in specific intervals. In most PoS protocols, participants with the highest stakes will more likely be chosen to validate the next block.

PoS protocols are highly scalable than PoW networks and handle more transactions per time. This way, applications built on PoS networks process tasks faster and more conveniently. To leverage these benefits of the PoS model, Ethereum (largest blockchain for decentralized applications) has initiated a shift from PoW via the Ethereum 2.0 or Eth2 upgrade.

Benefits of Proof-of-Stake

  1. Earn Passive income: A user can earn passively while keeping track of their cryptocurrency.
  2. Eco-friendly: PoS blockchains are environmentally friendly as the transaction validation leaves small amounts of carbon footprint compared to PoW.
  3. Cost-Effective: It is cheap to run PoS protocols, as they do not require expensive hardware equipment compared to PoW protocol.
  4. Secure: PoS systems are more decentralized and secure than PoW protocols. PoW protocols are vulnerable to the 51% attack, where miners can easily edit transactions to their advantage if they control 51% of the network.

How to Stake?

To get started with staking crypto, here are some of the steps one is supposed to follow:

1. Choose cryptocurrency or coin to stake

As a user, you will be required to select your preferred cryptocurrency from the many platforms that integrate the PoS mechanism. Here are some of the top crypto to select:

  • Ethereum (ETH) – This is the first-ever crypto issued on a programmable blockchain that supports the development of decentralized apps (DApps). Ethereum blockchain runs on the PoW consensus algorithm but has started rolling out Eth2, which integrates the PoS model.
  • Solana (SOL) – This is a platform for building the next generation of DApps to provide decentralized finance (DeFi) tools. Solana aims to build a scalable network that is secure and highly decentralized without compromising on its high throughput. The blockchain boasts high transaction throughput, over 50,000 transactions per second (fps).
  • Cardano (ADA) – This blockchain project decentralizes power from unaccountable systems to peers, creating a more secure, transparent, and fair society. Cardano deploys the PoS consensus mechanism for its blockchain.
  • Polkadot (DOT) – This is an open-source and heterogeneous platform that facilitates the trustless transfer of data or blockchain assets across diverse blockchains. Through Polkadot, many blockchains have become interoperable, making the web more decentralized and private.
  • EOS EOS is a blockchain deployed to reinforce decentralized programs. EOS tokens are indigenous to its blockchain, and users earn a reward after staking the tokens. As of April 2021, the rate of return for risking EOS is 3.2%.
  • Tezos (XTZ) – This blockchain is open-sourced with its native currency, XTZ. Tezos can be staked on supported networks and platforms. Its current expected return rate is at 6%.

🔥 Read more on: Best Crypto Staking Coins in 2022

2. Select a crypto wallet for staking

Select a crypto wallet of your choice where you will store your coins so that you can stake and earn rewards.

3. Meet the minimum threshold for staking

Different blockchains have unique requirements for their staking programs. While some protocols like Cosmos have no minimum requirements for staking, others require a set minimum amount of coins so that you get to stake. Ethereum, for its Eth2 upgrade, requires a minimum investment of 32 ETH for stakes. 

4. Select hardware of choice

Staking protocols often implement tough rules like slashing, which may involve taking a proportion of users’ stakes (slashing), or removing their stakes, when they are offline or attempt malicious operations. 

As such, you will require a reliable computer with an uninterrupted internet supply when staking. The ideal device should also be cost-effective in terms of energy costs. 

5. Start Staking

Since you have already chosen your staked coin, downloaded a preferred wallet, which you have transferred the minimum amount of cash required, or even more, and you have set up the proper hardware to use for staking, you can now start staking.

Crypto Staking Benefits

It is beneficial to stake crypto as one earns more cryptocurrency, given that interest rates on some protocols are quite favorable. It is not strange to get a user earning an interest rate of more than 20% per year in some situations. 

Staking is one of the profitable ways of investing money in an emerging product as blockchain. By staking, a user can sustain the efficiency and security of a blockchain. A user benefits from staking, as it does not need any equipment to stake crypto compared to crypto mining. 

Staking crypto is also more environmentally friendly than crypto mining.

Disadvantages of Staking Crypto

The main disadvantage of staking cryptocurrency is that large shareholders have unmatched influence over the network. The proof of stake becomes more centralized when fewer coins are distributed. It is disadvantageous to some users, as in the PoS. 

Choosing a validator depends on the amount staked. The higher the amount staked, the higher the possibility of being selected as a validator. Other disadvantages include:

1. Costly Staking Requirements

Most blockchains have set minimum amounts that a user has to stake. This is disadvantageous to users who want to risk but cannot do so because the minimum requirement is more than they can afford.

2. Hacking 

Decentralized finance (DeFi) staking is risky as some staking platforms use insecure, smart contracts, making it simple for hackers and scammers to steal participants’ funds. 

Errors in code in DeFi can also cause system failure, leading to various unwanted outcomes like locking up user funds. Users must research the appropriate secure staking platform to avoid such vulnerabilities before opting into the staking program.

3. Crypto Price Volatility

There is always the likelihood of staked assets losing value in cryptocurrency staking. This will lead to a loss in earnings on the user’s part.

❗️Having doubts? Ge prepared and understand more about Crypto Staking Risks

When Should You Stake Crypto?

It is advisable to stake crypto when you have unused cryptocurrency in your portfolio lying dormant. As explained above, it is easy to do it, and you will grow your crypto through the process.

It is important to assess each cryptocurrency to know if it is a good investment on your part. You can then buy a cryptocurrency for staking after researching and finding out that it is crypto worth staking. 

Before staking, you should also explore whether a given cryptocurrency allows staking. Also, analyze the returns you get after staking a given cryptocurrency to evaluate the risks against benefits and select the crypto that best suits your investment.

How Staking Rewards are Determined?

Factors considered when evaluating the reward members will get after staking include.

  • The rate of inflation
  • The amount of crypto staked by a member – the more coins staked, the higher the probability that the participant is selected to validate transactions on the blockchain.
  • The staking period – a member who locks up their funds longer will receive higher returns.
  • The staking pool size

Staking rewards are a form of passive income in that a user is not required to do anything but to have the right assets at the right time in the right place for a given period. The more a user stakes coins, the higher the expected reward.

Conclusion

Like many other investments, staking presents a way for users to earn from their inputs. The opportunity presents risks, which can be extensively limited by ensuring due diligence before investing in a staking program.

One platform to start your staking is on Hi.com. The platform runs a PoS consensus mechanism that supports staking for participants. Hi.com offers flexible earnings for stakes, with eligible payouts in 7, 180, or 365 days. The platform also supports earnings for users who hold their crypto assets on hi, with up to 40% annual percentage yield (APY) – arguably one of the highest across the blockchain industry today. 

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