Did you know it is possible to earn cryptocurrencies as a reward by contributing to the network? If not, cryptocurrency staking is one of the areas you should definitely be aware of.
The topic of cryptocurrencies has become very popular over the past years, and especially in 2021. Not only is it a topic that many people find demanding to process, but it is also a complex field consisting of different terms and sub-topics whose understanding is crucial to get a complete insight into what cryptocurrencies really are.
If you already understand the basics of mining when speaking of cryptocurrencies, it will be even easier for you to learn about staking. In fact, the principle of both mining and staking is very similar: the users who participate in the activities are rewarded afterward, which is a tempting feature for the risk-takers.
Putting explanation of cryptocurrency staking in simple words, we can think of it as a way to put your coins aside (into a Proof-of-Stake blockchain), so you cannot use them at the moment. However, you can get staking rewards after some period of time which means getting more coins back.
It is often compared to putting money into a savings account in a bank, and then in addition to your money, you get also extra interest.
Even though this concept works well as an explanation, staking is very different in its nature.
Maybe you are asking yourself, how do you actually contribute to the network? The answer is your active participation in the process of transaction validation.
Quick Facts About Staking Cryptocurrency
- Staking is an action where you actively participate in the transaction validation process
- Not all cryptocurrencies are eligible for staking
- In contrast to mining which works as a PoW chain, staking works on a basis of PoS blockchain
- You have to comply with minimum balance requirements to be able to participate in staking and to receive staking rewards afterward
First things first, even though we explained the concept of cryptocurrency staking in a relatively simple way, let us dive into it deeper by explaining some crucial terms.
PoS vs. PoW
In the world of cryptocurrencies, blockchain makes it possible to store all the transactions that have ever been made. It is stored on a peer-to-peer network of nodes, that, however, do not necessarily have to be placed in the same location.
Decentralization is one of the main reasons why blockchain technology has become so widespread. An individual simply cannot gain control over the network.
Understanding the meaning of Proof-of-Stake will help you to get the whole concept of staking more easily.
Proof of Stake (PoS) and Proof of Work (PoW): both are types of consensus algorithms that make it possible to confirm transactions and consequently create new blocks in the chain. What they also have in common is their mission to maintain and protect the decentralization of the blockchain network.
The Proof of Work algorithm is widely used in Bitcoin mining to validate ongoing transactions – these are afterwards grouped together into blocks. When this step is done, blocks are ready to be chained together to contribute to the blockchain.
Proof of Work is also responsible for introducing new coins into the circulation.
In mining, all the nodes have the same intention and it is to be the first one who resolves an equation, which requires a whole lot of energy.
But why being first? The answer here is – the first one is enabled to add a new block into a chain.
So now we are getting closer to the question: what is then different with Proof of Stake?
Instead of putting efforts into outperforming the competition, staking uses actual coins.
In Proof of Stake, the decision of which node is about to validate transactions is assigned randomly. However, there is a direct proportion between the ‚chosen‘ node and the coins – the more coins associated with a certain node, the higher the chances.
This fact is really crucial and perhaps the reason why people are so enthusiastic about Proof of Stake – there is no such thing as the strong rivalry among the high-tech computers, as it is in Proof of Work.
|Was invented first||✔|
|Is responsible for introducing new coins into circulation||✔|
|Works more energy-efficiently||✔|
|The first that solves an equation adds a new block into a chain||✔|
You can remember the difference very easily, as Proof of Work is literally about the competition who works harder to be the one to update the ledger.
How Does it Work?
To sum up what has been discussed so far, the whole principle of staking lies in locking your cryptocurrency into a network, where you might get a possibility to create a new block. If you are the lucky one to create a new block and update the ledger, there will be a reward waiting for you.
Depositing funds is an equivalent word to explain staking cryptocurrency.
The first step of staking is to make sure you have a minimum balance of cryptocurrency that is needed for staking, which is later transferred to the network by a node. The minimum amount differs from one cryptocurrency to another. We will come to this further down in the next section.
Users that meet the minimum requirements to be able to stake are also called validators.
In Proof of Stake, the choice of the winner is random, however, as we outlined previously, there are some factors that might higher your chances to win, such as the number of coins or for how long they have been staked.
The winner contributes to the network by creating a new block and in return gets coins as a reward.
So far, we have been looking at Proof of Stake and cryptocurrency staking from a very positive point of view. However, as everything in this world, staking also has its ups and downs.
There is a possibility to go through the validation process with help of different platforms if you for example do not have equipment that is powerful enough.
In cases like this, you will not avoid paying additional fees and what is crucial here is to make sure the platform you are about to use is secure, as it will take over your coins.
Eligible Cryptocurrencies for Staking
It is important to note that not all cryptocurrencies support staking. In this section, we will discuss some of the eligible ones.
Ethereum, as we know it today, works on the basis of the Proof of Work blockchain. However, the launch of Ethereum 2.0 – which is basically an upgrade to ethereum, brings some changes into place.
One of them is a shift in the type of consensus algorithm – Ethereum 2.0 is expected to use the Proof of Stake mechanism, which is quite a big advancement.
This change also results in lowering the barriers of entry, which is a good thing, as more people will be able to enter the blockchain – and that is making the network even more decentralized.
When it comes to the minimum balance required to be able to stake, users will need to own at least 32 ETH.
At the same time, 32 ETH is the maximum that a single node can bear, so in cases when people want to stake even more, multiple nodes need to be set up.
When it comes to the rewards, participants get a proportion of the new Ether. That is why the number of validators plays an important role here – the more participants, the smaller share of the reward.
Tezos is a blockchain that uses the Liquid Proof of Stake (LPoS) consensus algorithm. The minimum balance you need to be able to start baking is only 1 XTZ.
Wait, baking? You might feel overwhelmed by all the new terms, but do not get confused, Tezos uses the word ‘baking’ instead of staking. The meaning is, however, totally the same.
Cardano is a blockchain network that was founded in 2015 – the cryptocurrency is called ADA. The required minimum for staking is 5 ADA.
There is a possibility to join the so-called ‘pool’ or running it individually. It is much easier to join a staking pool. However, usually, users who decide to run their own pool do it with the intention to gain higher profits. On the other hand, they need more resources and to have advanced system operation skills.
There are other cryptocurrencies, besides these three mentioned above, that you can use for staking, such as Cosmos, Algorand or Polkadot.
Is Staking Worth it?
Staking is definitely a concept attractive for many people. The majority of them might be motivated to engage themselves in staking due to monetary rewards – which is not surprising at all.
Maybe you are asking yourself whether you should be considering investing in staking. It is, obviously, especially enticing for people who already own a considerable amount of cryptocurrencies.
It is important to keep in mind that there are also risks associated with staking cryptocurrencies, such as not knowing the exact rate of return or the possibility to lose a stake.