A Beginner’s Guide: What Is Crypto Coins Staking?

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Several fundamental concepts drive the underlying mechanism when discussing blockchain technology and its related cryptocurrencies. One of these is coins staking. But what is crypto staking? And how can users learn how to stake coins to earn crypto? This article examines staking in the depot to provide an easy-to-understand answer to ‘what is staking.’

Staking involves locking up your digital assets such as Bitcoin, Ether, USDT to receive rewards. As every transaction on the blockchain requires verification – this rewards-type system helps users who have cryptocurrency to verify transactions and support the network essentially earn crypto. 

How Does Crypto Staking Work?

Staking is an alternative to crypto mining. It consists of holding cryptocurrency in a digital wallet to support a specific blockchain network’s security and operations. By ‘locking’ or putting away the cryptocurrencies, users can receive staking rewards.

In most cases, staking coins can be done directly from your crypto wallet, although it is also possible to do so through one of the services offered by crypto exchanges. The crypto exchange Binance, for example, provides a staking option that lets users earn rewards in a simple way – all you have to do is hold your coins on the exchange.

To fully understand what is staking and the staking tool used, you need to grasp how Proof of Stake (PoS) works. PoS is a consensus mechanism that allows blockchain to operate more energy-efficiently and eco-friendly while maintaining their decentralization degree (at least, in theory). Let’s look at what PoS is and how staking works more closely.

Is Staking the Same as Yield Farming?

It’s a similar concept. But it’s different from one another. Staking involves validators to lock up their coins based on the PoS consensus algorithm. While yield farming boasts of the lending pool that allows the token holders to generate passive income in exchange for the interest rate. When comparing staking and yield farming, staking is less risky.

What Is Proof of Stake?

Proof of Stake (PoS) is a consensus algorithm for blockchain networks based on random validators among the community of users, who “stake” the native network’s tokens or coins by locking them into the blockchain. They do this to produce and approve blocks. The users who act as validators are rewarded based on their total stake, incentivizing nodes to validate the network based on a return on investment (ROI).

PoS is considered the greener and more scalable version of the original Proof of Work (PoW) consensus used in Bitcoin’s blockchain. As it does not rely on as much arbitrary computation as PoW does.

Rather than solving complex mathematical puzzles to keep the network secure, the PoS mechanism incentivizes (or stimulates) users to strengthen the blockchain network in exchange for a reward in the form of crypto. This reward also serves as an interest. The PoS mechanism allows users to generate a passive income only by holding coins as they earn crypto.

Typically, validators are selected to produce the next block based on the size and the average period it holds of their stake. Although there are other functions to prevent a front-running consensus, a larger stake usually gives users a higher chance of producing the blockchain’s next block. Proposed blocks by validators are then propagated to the rest of the set, who verify and add the blockchain’s approved block.

What Is A Delegated Proof of Stake?

Delegated Proof Of Stake (DPoS) is another consensus algorithm that expands on the fundamental concepts of Proof Of Stake. Developed by Daniel Larimer, founder of BitShares, Steemit, and EOS in 2014, it differs from traditional consensus mechanisms.

Unlike the Proof of Stake (PoS) mechanism, where validators are chosen randomly and based on their stake size, under the DPoS mechanism – coin holders vote for “delegates,” responsible for validating transactions and maintaining the blockchain. DPoS is an alternative to the more commonly known, Proof-of-Stake (PoS) model, as it requires stakeholders to elect what is known as witnesses. 

DPoS Witnesses

These witnesses are responsible and rewarded for generating and adding blocks to the blockchain. Each stakeholder is allowed only one vote per witness, with witnesses with the most votes being elected. Stakeholders can vote for as many witnesses as they wish, provided that at least 50% of the stakeholders believe sufficient decentralization has been achieved through the number of elected witnesses. The voting for witnesses is an on-going process. This provides the incentive for witnesses to carry out their function to the highest standard or risk losing their position. There is an additional reputation scoring system built into the network to assist stakeholders in better assessing the quality of witnesses.

When a cryptocurrency relies on the DPoS consensus, a chosen group of witnesses is replaced. May it be at a fixed time, once a day or once a week. That is to ensure each witness receives a turn to produce a block. If they fail to do so within the allocated time, it typically results in a witness being skipped and negatively affecting their reputation score.

The Delegates

Besides, there are other participants known as delegates. Delegates are elected similarly to witnesses. They are responsible for maintaining the network and can propose changes that need to be voted. Once these changes have been submitted, it is then up to the stakeholders to vote whether the proposed changes should be implemented. Whether or not a reward incentive system exists for delegates will vary depending on the implementation of the DPoS consensus mechanism.

Additionally, the DPoS mechanism requires that users also vote for a group of delegates who oversee blockchain governance. Although delegates do not play a part in transaction control, they can propose changing the block’s size and the amount a witness should be paid in return for validating a block. The blockchain’s users can then vote on the changes proposed by the delegates.

Cold staking protocol.

What Is Cold Staking?

There are different ways to stake crypto, and one of them is cold staking. Cold staking consists of staking a cryptocurrency or coins that are stored offline, typically in a hardware wallet. This is usually done for security reasons as hardware wallets are more difficult to hack than web-based ones or exchanges.

With cold staking, the user must keep their crypto in the designated offline wallet to earn crypto. Moving the funds to a new address will result in the participant losing the staking reward. 

What Is A Staking Pool?

Most blockchains that run on a PoS mechanism let you stake coins on your own. However, sometimes this may keep you from making the most out of your stake. 

Stakepool operators run a staking pool. And these are the network participants with the skills and hardware to reliably ensure consistent uptime of a node, which is essential in ensuring the success of the PoS protocol and the blockchain network.

To take advantage of the full benefits that staking offers, you must stay connected to the network 24/7. Even a brief misconnection can disrupt your earning potential, sending you back. But joining a staking pool can offer a way around this.

Staking pools are a way to stake crypto without having to run it on your hardware or with a virtual private server provider. A staking pool runs a master node on a server with a high-speed connection to the internet and is always serving the blockchain.

Because they have many users behind them, staking pools also have larger stake sizes, and that increases the odds that they will get picked to write a block or vote on a block that gets written to the blockchain. For that reason, staking pools are perceived as an easier way to earn crypto with more frequent and consistent rewards.

The Advantages and Disadvantages of Staking

Staking is a process that consists of buying and holding crypto in your wallet and earning profit from it.

Generally speaking, it doesn’t have any disadvantages that may deter you from trying. It doesn’t carry any risks because you only lease your coins to the validator but retain full control and ownership over them. 

The main advantages of crypto coins staking are the generation of passive income and low entry. If you use a staking pool or online service, staking can be simple and easy to do. It is also considerably more energy-efficient than mining and less risky than trading.

The only drawback comes from the expected profit since some coins are notoriously volatile or have a very high inflation rate. A potential fall in the value of the coin can also devalue you’re the staking interest you have earned.

Whenever you are staking a coin, you need to consider its real-world application. Many staking coins are created only to stake. This doesn’t give them any particular advantages as a means of payment or hedging. The reward rate may be high, but the usability potential is low, which means you may result in coins with little to no value in the future.

Is Staking Profitable?

Crypto staking is becoming more and more popular, with many users describing it as ‘profitable’ as mining. However, unlike mining – it does not come with significant overhead and electricity costs. 

The amount you earn when staking depends on multiple factors, such as the block reward, amount of supply locked, size of staking pool, and highest possible reward, among others.

Generally, the longer you hold (stake) the coins, the higher the payout will be. However, the value of the coin should also be taken into account when calculating profits. 

How Are The Staking Rewards Delegated?

Delegation of staking reward varies from coin to coin. Some may require you to access the dashboard of the respective coin or project and import your wallet to MetaMask (or connect your hardware wallet to MetaMask) to delegate to an operator.

Once you have input the number of coins you want to delegate, you have to specify a Beneficiary or Rewards Address. Your rewards from staking the coins will be sent after being generated by stake doing work on the network.

What Are The Rules for Crypto Staking?

When you’re staking crypto, you need to consider the terms and rules of the respective staking pool and blockchain. Some allow for both online and offline crypto staking, while others do not. If you want to stake offline, you will have to use your PC as the staking node, sometimes called a validator node or the delegate node. Depending on the blockchain, different projects require different nodes. Some of the coins that support PoS require that the node you use meets the minimum technical requirements to keep the network’s operation quality high.

Before you can start staking, it is crucial that you check if the blockchain uses the Proof-of-Stake mechanism. There are several general conditions to comply with when using a staking service and others if you stake individually:

  • The wallet has to be online 24/7 (unless you use cold staking).
  • The wallet must support staking.
  • The coins have to mature for a couple of days before you receive a staking reward.
  • There may be a minimum amount.
  • Each blockchain has different rules for its coin. It is therefore advisable to find out specifically for each coin which restrictions apply. 

How to Stake Coins?

To begin staking cryptocurrency, you need to follow these five steps:

  1. Choose a coin to stake: Read on the available PoS coins and select the one you want to stake.
  2. Download the wallet: A software wallet is essential to stake the coin tied to it. It is where you store the funds used for staking. Once you select your preferred crypto, go to its respective wallet, and download the wallet.
  3. Determine the minimum requirements: Some coins have a minimum number of coins required to stake. Dash requires 1000 DASH, while Ethereum plans to start with 32 ETH. There are PoS coins like PIVX, NEO, and PART with no required minimum but need to be verified first.
  4. Decide what hardware to use: Most PoS mechanisms require a 24/7 connection to the network and uninterrupted internet access. You can use a standard desktop computer but need to have a reliable Internet provider. A Raspberry Pi can do the job as well and might save electricity. You can also use virtual private servers (VPS) to avoid maintenance hassles.
  5. Start staking: After you set up your wallet, you can begin the staking process. It would help if you remained connected to the internet at all times unless you’re using a VPS. 

Which Crypto to Stake?

Many cryptocurrencies use the PoS mechanism, and the list grows every year. Currently, the most popular coins for staking are:

We have highlighted some popular staking coins below. The interest rates are on an annual basis and is subjected to changes:

  • Tezos (~7% interest rate)
  • Cosmos (~7.2% interest rate)
  • Komodo (~5% interest rate)
  • QTUM (~4% interest rate)
  • Decred (~9% interest rate)
  • ICON (~19% interest rate)
  • ZCoin (~14% interest rate)
  • PIVX (~9% interest rate)
  • NOW Token (up to 25% interest rate)
  • Ethereum (soon with the release of Ethereum 2.0)

Where to Stake Coins?

You can stake coins online and offline. There would be different options if you chose to stake online – using a staking pool, an online service, or an exchange.

Each staking method has different requirements and terms, so be sure to check them out before you start staking. For example, an exchange may require that you hold all your PoS coins on it or incur some fees or take them off. You can try staking on TrustWallet.

The Bottomline

Proof of Stake and staking opened up the crypto sector to far more participants who don’t have the hardware capacity or technical know-how to mine or trade cryptocurrencies. Crypto staking is available to virtually anyone who wants to participate in the consensus and governance of blockchains. What’s more, it’s a straightforward way to earn passive income by simply holding coins. As entry barriers to the blockchain ecosystem get lower, staking is becoming more comfortable, easier, and more affordable.

It’s worth keeping in mind, though, that staking isn’t a ‘get rich quick’ scheme, and the profits you can expect are significantly lower than if you trade crypto, for example. Consecutively, so are the risks. Staking doesn’t carry the risks associated with mining as it requires no equipment setup or complex installations. Occasionally, the staked coins may depreciate, so it is essential to select less volatile and real-world utility.

Staking coins is a cheaper and less risky way of participating in a blockchain network’s validation process and earn crypto for it. 

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This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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