Staking is the generation of additional coins by storing them on the exchange, giving it liquidity. The generation is based on the so-called proof-of-ownership algorithm – PoS (Proof-of-Stake).
A share is a certain number of units of a crypto coin that support the operability and security of its network (blockchain). PoS blockchains entrust the process of processing operations and creating blocks of a chain of records of operations to trusted nodes (masternodes).
Simply put, you store (stake) your money in a crypto wallet under certain conditions in order to increase income (the number of new blocks in the network is growing). Therefore, staking can be compared to receiving passive income from investing funds on a bank deposit. The multiplication of your asset (block reward) increases as the money (shares of cryptocurrency) in your account increases.
Simplistically, the whole process of staking can be reduced to the following steps:
- choosing a coin for staking with PoS algorithm support;
- registration of a crypto wallet for the selected coin;
- replenishment of the crypto wallet;
- choosing a platform (exchange) for staking;
- depositing money from a crypto wallet and launching the staking process;
- receiving a reward.
How is staking different from mining?
Staking is a kind of traditional mining – PoW (Proof-of-Work), on the algorithm of which Bitcoin works. The complexity of Bitcoin mining is constantly growing, and its mining is becoming unprofitable. We can say that staking is the next evolutionary stage of the initial mining with a number of fundamental differences.
- Mining speed. If miners perform complex calculations for months to extract new blocks (receive cryptocurrencies), then stake holders do this by simply freezing funds on a regular crypto wallet and extract a new block after a few days or even hours.
- The method of receipt. Miners need a lot of electricity and constant investments in expensive equipment (video cards, ASIC farms) to get more income, and stakers do not need any of this! Their income is affected only by the number of coins frozen in their wallets: the more of them, the higher the monetary gain.
- Competencies. A high level of knowledge gained over a long period of time is critical for miners. The basics and a few days of practice are enough for a staker.
- The nature of earnings. If the miner is forced to be constantly involved in the process of generating income, then the staker gets additional money on the liability as easily as possible.
Types of staking
Fixed Staking (Locked Staking)
It is assumed that you choose a convenient term for investing cryptocurrency, during which you will not be able to withdraw it. Your money is frozen in the blockchain, but continues to work for you. After the staking period expires, you automatically receive funds with interest. You can “lock up” your crypto assets, for example, for a week, a month, a quarter, six months, a year or more. The income for this type of contract will also be fixed and can range from 2 to 20% per annum.
Indefinite or Flexible Staking
Here you no longer need to specify the end date of the staking. You can close the contract at any time, and interest will be accrued until you withdraw your money. The first reward for staking comes a day later, although it is not possible to receive a payout every day. The best option may be to receive a percentage once a month. The main drawback is the low yield on this type of contracts (3-5% per annum).
The highest growth of cryptocurrencies on the passive is provided by the so-called decentralized financial systems (DeFi), working only on the blockchain. Here, third parties are included in the process: companies and individuals who take money from you on a loan at an interest rate. The use of such smart contracts ensures the control and automatic execution of transactions on pre-established conditions by you.
Among the advantages of DeFi-stacking: daily fast withdrawal of interest, higher profitability (from 100% per annum) with a low entry threshold and guaranteed payments from reliable services.
Choosing a cryptocurrency for staking
The approach to choosing a coin on PoS is not much different from the standard investment. You can get an insight and buy a little-known cryptocurrency in the hope of its rapid growth, which is risky. But you can do more wisely and pay attention to already well-established assets.
Among the cryptocurrencies on PoS, it is definitely worth looking at the leaders of this market. For example, one can objectively distinguish: Etherium, Solana, Binance Coin, Cardano, TRON, EOS, Tezos, DASH, Stellar, DEL or Polkadot.
It is important to understand that different PoS coins can work on different blockchains, so be prepared to register in several crypto wallets or services until you decide on your own set of “favorite coins”.
The staking rewards service can help in this matter. It publishes the current TOP 10 cryptocurrencies on PoS, depending on the global volume of staking. But there is also an analogue, the reliable rating agency CoinMarketRate.
Each of the many such platforms offers unique staking conditions from a certain set of PoS coins for minimum deposits, terms, profitability, commissions, etc.
Decentralized Crypto Exchanges and Staking Pools
These are “trendsetters” in PoS mining, where you can engage in staking without an intermediary, unlike centralized exchanges. It has the highest profitability (up to 100% and above), but also the highest commissions for withdrawing coins from staking.
So, mostly experienced stakers “hang out” on the betting pools, pooling their money in such a way as to become so-called validators who receive the highest reward. The most striking example is the Auto CAKE pool, which allows you to buy and freeze a CAKE coin with an annual yield of up to 50%.
There are decentralized platforms that offer lower profitability, but also greater reliability compared to individual validators. The largest of them are Everstake and Wetez.
Centralized Crypto Exchanges
These sites were not originally “sharpened” for staking. Recently, the provision of such an additional service has become a kind of gesture of friendliness of the crypto exchange towards the client. If the user receives a pleasant bonus from the platform in the form of staking, then for the exchange this is additional income from another type of commission. Centralized exchanges are, of course, not the most profitable, but still a relatively safe option for staking. Among the most famous and major players here can be noted, for example: Binance, Waves Exchange, Kucoin (Pool-x), Cex.io , Kraken.
The most secure way to stake coins is both with the help of “hot crypto wallets” (Guarda, TrustWallet, Exodus, Wax Cloud Wallet, Atomic Wallet) and with the help of “cold (hardware) wallets” (Ledger or Trezor). The latter type of wallets is the most reliable, but requires investments in the device. “Hot wallets” are installed on a PC or smartphone. In any of the wallet options, a different number of pools of PoS coins are available with different conditions and relatively low profitability.
Risk management in staking
There are three main risk factors in betting: the collapse of the rate of a crypto coin or its scam, delisting of an illiquid coin from a crypto exchange and the closure of a betting platform.
It is important not to rush to any hype crypto asset, but carefully choose proven coins. Their exchange rate is usually relatively stable, and most likely does not demonstrate significant growth potential. This is especially true for fixed staking, when when the price of a coin collapses, you simply will not be able to sell it right away.
It makes sense for beginners to start working in perpetual or decentralized staking. This will allow you to protect yourself as much as possible from a sudden drawdown of the coin rate, when you can quickly implement it by simply closing the contract.
Prospects of staking
Despite the fact that staking has been known to the global crypto community since 2012, it is still trending, having huge potential.
The fact that new unique offers for cooperation are constantly emerging in this market speaks in favor of the prospects of staking. The vast majority of coins today work on the Proof-of-Stake algorithm.
Staking opens up great opportunities for many people who want to have passive income in relatively easy ways. And from year to year, these methods are only being simplified and improved.