Staking is one of the most misunderstood concepts in the crypto industry.
Always more users and crypto enthusiasts think that when a passive income occurs, this is surely generated by staking. But it’s not like that!
Staking is the active process of taking part in the security operations and transactions of a blockchain network based on a consensus mechanism called proof-of-stake (PoS). Participants who decide to stake their funds receive rewards in return - which is why it has become a popular source of passive income. Each blockchain network may use a different way of calculating staking rewards.
But before going into the explanation of staking, it is crucial to understand the functioning of the consensus mechanisms on which most chains are based, PoS and PoW (proof-of-work).
If you haven’t done so, read our article analysing these two consensus mechanisms: PoW vs. PoS.
How does staking work?
Staking can be defined as the fuel of the chain that relies on the PoS mechanism, just as mining is for the PoW chain.
The main difference between PoW and PoS is that with PoS, it no longer has to prove that it has used a certain amount of energy to be entitled to validate a new block (mining).
Staking validator and delegator
To become validators in a PoS chain, it is necessary to have a certain amount of cryptocurrency, which can be staked or -in jargon- “skin in the game”.
The logic behind this process is simple: if you have many coins in a given chain, you will be more interested in protecting that chain and making it work properly.
You can stake your coins as a validator or delegator.
Usually, middle users are always delegator, becoming a validator require strict characteristics:
Huge amount of coin;
Keep the validator’s node always online and active (this means particular hardware requirements like GPU, for example).
For these reasons, you can participate in staking and receive rewards or passive incomes by delegating validators.
You need to choose the right validator to avoid risks as a delegator.
Relying on a malicious validator can entail the following risks:
Slashing: this happens when a validator does not perform its task properly. (For example, it stays offline for some time). The validator receives a penalty that varies in percentage depending on the severity of the error committed.
Jailing: this happens in very severe cases and involves the inclusion in the blacklist and the loss of the validator role.
It is essential to pay attention to these two points as delegators. As in the case of slashing, the punishment affects not only the validator but also all its respective delegates.
Another important consideration to be made regarding validators is the voting power.
The voting power is obtained by the validator based on the number of delegations and, therefore of coins that it receives. This voting power serves as decision-making power within the chain, influences the probability of validation of the next block in percentage and has a significant weight in governance decisions.
To learn more about the last concept, read what is DAO.
Here you can read an interesting article about what staking is.
How can you stake your crypto?
Staking your crypto is very simple; you have different options:
You can choose the specific wallet of that chain (directly on your desktop) and stake it from here. Always consider the lock-up or unbonding period-usually 21 days- the waiting period from when you decide to un-stake your cryptos and when they will be returned with interest.
If you want to avoid the lock-up, you can use the services of intermediaries (such as Bitpanda, for example), which provide lock-in and auto compounding services or a simple exchange like Binance, Coinbase or Crypto.com.
Cold staking, where stakers have to keep staked coins in the same address since moving them breaks the lock-up period, which consequently causes them to lose staking rewards.
Staking can be a more or less complex task. Before risking, it is important to study, understand the logic and analyze the reference coin with its related project. A useful tool you can rely on is Stakingrewards.com which gives you a complete overview and all the data you need to evaluate a coin to put in staking.
In-depth analysis of staking pools and cold staking.
Benefits and risks of staking
Stake your crypto has a lot of benefits for every investor who wants to make an easy earning from its holding. Among the advantages, there are:
Less energy consumption in comparison with PoW;
High returns and passive incomes (always depending on the specific cryptocurrency)
As a delegator, no specific equipment for staking instead of mining;
The satisfaction of playing a crucial role in a project you believe in;
PoS is eco-friendlier and more decentralized and secure.
However, staking isn’t risk-free. You can run into these risks when you decide to stake your crypto:
Crypto prices are highly volatile. When you stake, always remember the lock-up period, which means you won’t be able to access your crypto for a certain time;
Depending on your approach, you might need to entrust your crypto to an exchange or a good validator so it can be staked, leading to security risks;
High staking requirements ( in other words, the minimum staking requirements imposed by the blockchains);
Hacks, scams and whales dominate.
DeFi staking differs from direct staking on decentralized protocols or centralized platforms offering pool staking. Users on DeFi platforms rely on smart contracts to participate in staking and earn rewards.
Staking on DeFi platforms is commonly called liquidity mining or yield farming. As the name implies, it is the process of helping to provide liquidity to DeFi protocols in exchange for commissions. The added liquidity often sent to liquidity pools that aggregate the loaned assets comes in users’ crypto assets, which are locked up in a DeFi protocol through smart contracts.
The most popular DeFi tokens to stake are UNI or SNX. In addition, there are also hybrid DeFi protocols that function as yield aggregators, allowing users to find the best staking yields on multiple platforms. The most popular yield aggregator is Yearn Finance.
Crypto staking is an activity that has revolutionized the world of cryptocurrencies.
As PoS networks proliferate and grow in influence- also thanks to the Merge e the new upgrade to Ethereum 2.0- this could be a powerful investment tool.
Before investing and staking, please do your own research and weigh up your risks.