Staking is a process used in the Proof of Stake cryptocurrency consensus model. It offers crypto holders a fixed return in exchange for locking their coins on the network. The staked crypto becomes inaccessible and unusable during the agreed time but can provide long-term returns.
Proof Of Stake Coins
Different coins use different verification protocols. Proof of Work was the first, but Proof of Stake is generally considered a better alternative by many users. Not all coins use the Proof of Stake protocol, and those with different staking requirements, as per this report from B2C KR, include some of the best staking coins currently available. According to crypto writer Hyunsoo Kim, staking coins offers handsome returns and a viable means of generating passive income. But what is staking, and is it right for your crypto portfolio?
Proof Of Work Protocols
When making traditional payments, the sender and recipient rely on the bank or other financial institution to verify the details of the payment. It is the bank that ensures that all the details are correct. Cryptocurrency payments are decentralized. There is no bank or institution to verify the details of the transaction.
To overcome this problem, and ensure that details are accurate, Satoshi Nakamoto proposed a system that would use a network of separate, unknown third parties to check and double-check all the details and verify the legitimacy of transactions. In exchange for transaction verifications, these miners would receive compensation.
What Is Proof Of Work?
When cryptocurrency transactions are processed, the blockchain network uses one of several consensus mechanisms to validate payments. Bitcoin, the first crypto, uses a method known as proof of work. When a payment or transfer is initiated, a network of third parties is used to verify the transactions. They do this by using computation power. The participants chosen to verify transactions, called miners, are rewarded with a relatively small amount of the cryptocurrency as payment.
Proof of work was first used by Bitcoin in 2009, and the world’s largest cryptocurrency continues to use this consensus. Many other blockchains use the same consensus, but it is processor and energy-intensive. Not only does this mean Bitcoin puts pressure on the energy network at a time when the world is trying to conserve its energy usage, but it also means mining tends to be concentrated in areas with cheaper energy consumption, and the process is restricted to those who reside in these areas.
How Does Proof Of Stake Differ?
The proof of stake consensus was devised by Sunny King and Scott Nadal in 2012, with King going on to launch Peercoin in 2013. Peercoin was the first cryptocurrency to use the proof of stake system.
Proof of stake meant users could choose to commit or stake coins they held to the verification process. The more coins staked, the greater the chance of a coin holder being chosen to verify transactions.
What Is Staking?
Staking coins means that a holder must commit to leaving those coins on the network so they can be used to verify transactions. When a user stakes coins, they enter into a contract with the network, agreeing that the coins will be locked in the network for a specific period. In exchange for locking coins to the network, the holder receives a predetermined amount of the coin in exchange, similar to mining, except without the need for extensive computing power.
While staked, cryptocurrency cannot be removed from the network. This means that the holder cannot sell them or transfer them. They are essentially inaccessible. This does deter some users, but staking rewards can be handsome.
Staking Rewards
The rewards earned are determined by the coin being staked and the staking partner. Rewards can be as high as 8% if you actively participate in the staking program, using an appropriate wallet, representing a long-term return from a crypto investment.
However, most novice stakes use exchanges that pool staked coins together and do the admin on behalf of stalkers. This is a popular option for those who are staking relatively small amounts. The staking partner takes a cut of the rewards but does all of the hard work. In these instances, you can expect to earn around 5% in staking rewards.
Some presales and ICOs also offer staking rewards. They operate in a similar way to the exchanges by pooling together the staked crypto of early investors. They take a cut of the rewards, which they use for the launch of their own cryptocurrency, and the holder receives what’s left. In some cases, presales offer additional bonuses to investors who are willing to stake their crypto, so you might get an additional discount on the presale coin, or you could have a chance of receiving an airdrop of additional crypto funds.
Liquid Staking
There are some hazards to staking crypto. The main hazard is that you do not have access to that crypto while it is staked. If the market drops while the coin is committed, you will lose out when you come to cash in the coins, and there’s nothing you can do about it.
Some decentralized finance applications enable liquid staking. Liquid staking means that you can buy and sell staked coins. These platforms convert staked coins into tokens, which can then be traded. However, there isn’t as much call for staked coins, which means it can still be difficult to sell these tokens.
Staking Your Coins
Holders should check the staking conditions before they commit. In particular, check the staking rewards as well as the staking period. It can also take some time to get your rewards once the staking period is finished, so look for some indication of this waiting time. Either use an exchange that offers staking or a dedicated staking platform or ensure you use a wallet that is compatible with the coins you want to stake and offers this feature.
Conclusion
Staking coins enables users to assist in the security and transaction verification processes involved in Proof of Stake cryptocurrencies. Examples include Ethereum and Solana. Staking coins makes them inaccessible for a given period, which can be as long as 6 months but does offer rewards between 4% and 8%, depending on the coin staked and the method of staking used.
