In a nutshell, staking is holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Essentially, it describes a form of proof of stake that investors lock up their coins to receive rewards. Additionally, any individual can participate in staking by locking up their coins as collateral.
Essentially, it describes a form of proof of stake that investors lock up their coins to receive rewards. Additionally, any individual can participate in staking by locking up their coins as collateral.
How Does Staking Work?
Staking is a great way to earn income from cryptocurrency. It allows you to lock your coins up for an extended period in exchange for a share of the rewards generated by the network.
Staking can be compared to investing in a savings account, with some important differences:
- With staking, there are no taxes on the interest gained.
- As opposed to a typical bank investment, you never actually lose money when staking; however, if you unstake your coins too soon, you will receive less of your initial principal back (the amount returned depends on when you unstaked and how long you’d staked for).
- Stakers get paid out daily instead of yearly or bi-annually, like most bank investments. This means that it’s easy to see how much profit they’re making over time!
Why the Shift to Proof of Stake?
There are a few reasons people think PoS is better than PoW:
- It’s more energy efficient. Unlike proof-of-work, where you’re competing against nodes worldwide to solve a complicated math problem, with staking, you’re just placing your bet on which block will be added next. This means that you don’t need as much electricity or computer power to participate in the network and get rewarded for it.
- It’s more decentralized. Because staking doesn’t require as much electricity, anyone can be a validator—you just need enough of the cryptocurrency in question to start staking with it. Since mining requires expensive hardware and access to cheap electricity, mining cryptocurrency has historically been dominated by a few big players who have significant resources at their disposal. But since anyone can participate in staking, there’s no barrier to entry—even if you can only stake a tiny amount of crypto at first, you can still earn rewards based on your proportionate share of coins in the network. This makes networks that use proof-of-stake far more decentralized than those that rely on proof-of-work.
- It’s more scalable. You don’t need a ton of validation nodes (think thousands instead of millions) to secure the blockchain because all they do is validate transactions from other nodes–they’re not wasting electricity-solving puzzles. This allows for faster transaction times and lower fees, ultimately leading to greater scalability (the ability for the network to grow). Transactions per second limit Ethereum compared with Visa’s 24k TPS (transactions per second). Ethereum recently shifted from PoW to PoS but is still limited by TPS compared with major payment processors like Visa and Mastercard.
Are there any Downsides to Proof of Stake?
There are some downsides:
- Fees are often high when you stake on exchanges.
- Block rewards can be low, depending on how many other users are staking. This is especially true if you’re a delegator instead of a stake pool operator, which brings us to our next point.
- As a delegator, you have to trust the stake pool operator (SPO) with your funds, who could potentially steal them or not know what they’re doing and lose them. You can mitigate this risk by choosing an SPO that’s been in business for a while and has good reviews from other users.
- If you’re an SPO, it usually involves more technical skill than setting up a master node or simply buying and holding coins/tokens in a wallet.
What should I look for in a PoS Network?
Your choice of a PoS network should be based on several factors. There are many good reasons to choose one network over another, but there are four important considerations that we think are most important: security, accessibility, documentation, and scaling.
- Security – Make sure the network is secure and has been thoroughly audited. You don’t want to run a node into an insecure network.
- Accessibility – The network should have low barriers to entry for new nodes entering the network. Ideally, you shouldn’t need any special hardware or software to participate in staking.
- Documentation – The project should have clear documentation on how it works and how developers can use it with specific examples and tutorials. This will help developers get started quickly without needing to figure out how everything works from scratch.
- Scaling – The project should scale as more users join and more transactions take place on it without suffering from congestion or slowing down in transaction confirmation times (i.e., block time).
Is there Anything that can go wrong with Staking?
As with any investment, there is some risk involved in staking. Remember: when you lock up your coins to stake them, you can’t always get them back right away. Depending on the network, it might take a while before they’re fully yours again. If the value of the coin falls during that time or if the network gets compromised and your coins are lost, you may lose money by staking.
If you’re keen on staking but still wary of these risks, there are ways to minimize your chance of losing money. For example, you can choose to stake coins from a wallet where your private key is stored locally (i.e., not by an exchange), just in case something goes wrong with the exchange itself.
What Are Some Popular Networks that Run on Proof of Stake Consensus Algorithms?
If you’re considering staking crypto yourself, here are some popular networks that run on proof of stake consensus algorithms:
- Ethereum—The second-largest cryptocurrency by market cap.
- Tezos—A smart contract platform with a built-in governance model.
- Cosmos—A decentralized network of independent and scalable blockchains.
- EOS—A smart contract platform focused on scalability and speed.
- Cardano—An open-source blockchain protocol for smart contracts.
- Algorand—A blockchain protocol where anyone can participate in the network.
- Dash—A payment system that allows for instantaneous payments to anyone.
- NEO—A Chinese project aims to digitize assets via a distributed network (their term).
- Ontology—Platform focused on data trustworthiness and digital ID verification.
- NEM—Blockchain software designed to help companies manage their business data (their term).
These are just some examples of projects that offer staking rewards; there are many more! Visit Tytanid and get more information about staking in crypto world!