In light of the recent developments in the crypto world, here is the one-billion-dollar question: What is staking?
Blockchain is one of the most explored technologies today. This smart and decentralized innovation creates trust, thanks to reliable consensus mechanisms like Proof-of-Stake (PoS) that help the network participants reach an agreement via staking.
PoS is a form of consensus that allows the token holders to stake their cryptocurrencies and use this stake to validate transactions and create new blocks. Comparatively, Proof-of-Work (PoW) requires miners a lot of computing power to confirm blocks.
In PoS, validators need to have a significant amount of stake to participate in network operations. Therefore, PoS is deemed to be more sustainable, efficient, and scalable. Aside from that, the staking process is also a new way of getting profits through staking rewards.
In this article, we dig deeper into the fundamentals of staking and learn its advantages. More so, we will take a look at the best staking coins and how can you start staking your crypto.
What is staking?
To clarify, staking just means locking one’s asset to participate in transaction validation processes. In most cases, you can stake your coins directly from a crypto wallet. Otherwise, a lot of crypto exchanges offer various staking services to users.
Known also to be a more energy-and-resource efficient alternative to mining, holding cryptocurrency funds in your preferred location is done to support the security and operations of a specific blockchain network. Above all, staking attracts token holders due to its rewards.
Practically speaking, this process is only applicable to particular blockchains that utilize the PoS consensus mechanism. Those who stake their crypto in a PoS blockchain are specifically called “validators”. By locking assets, they provide value to the network and get incentives in return.
Overview of the staking market
As of early October 2020, the capitalization of the staking market is estimated at $35 billion, with over $15 billion locked in staking. At the time of writing, staking data hub Staking Rewards has listed 149 assets, with an average rewards rate of 20%, a significant increase from the previous year’s 12%.
Moreover, PoS dominance increased by 5% from 2019, reaching a 22% value. Though, PoS may not be the sole reason for the increased staking activities. Instead, the decentralized finance (DeFi) growth in 2020 must be put into consideration.
On the other hand, in terms of market cap, the biggest cryptocurrencies in staking are Polkadot (DOT) with almost $4 billion and Cardano (ADA) with $3.4 billion.
As seen on the charts above, the staking market is quite fluid. However, its market dynamics might continue to change as Ethereum 2.0 launches and other DeFi protocols persist in the market.
How does staking work?
Now that we have answered the question “what is staking?”, it is important to have a basic knowledge of PoS to understand how staking actually works.
Again, Proof-of-Stake is a consensus mechanism that allows blockchains to operate more conservatively in terms of energy used while still maintaining a decent degree of decentralization.
Within PoS-based networks, what determines each participant’s power and influence when creating a block is not their ability to solve hash challenges — basically how Proof-of-Work works. Instead, it is determined by how many coins they are staking.
Staking involves validators who lock up a specific amount of their coins. Be that as it may, they can be randomly selected by the protocol at specific intervals to create a block. They are chosen based on the quantity and quality of the validator’s staked digital assets.
Significantly, those who stake larger amounts have a higher chance of being chosen as the next block validator.
On the contrary, some blockchains have their fixed staking requirement and then randomly pick validators from the list of addresses that meet their predetermined criteria. Selection criteria vary from platform to platform but each one considers the node’s wealth or volume of the staked amount and the staking age or duration of the locking period.
Without relying on specialized mining hardware such as ASICs, validators only need to ensure that they meet the technical and financial requirements of a network like the minimum stake amount required. So, instead of competing for the next block with higher computing power, PoS validators are selected based on the higher number of staked coins.
Otherwise, if you do not qualify for running your own validator node, you can delegate a stake to elect a legitimate block validator. Voting for delegates is how Delegated-Proof-of-Stake (DPoS) works.
In other words, this is an alternative version of PoS that aims to achieve a lower number of validating nodes. These elected validating nodes (delegates) will then be in charge of the network operations and overall governance.
As far as the explanation goes, it can clearly be understood that staking hugely impacts how a blockchain functions as a whole and those who stake drive a network’s value further.
Risks and benefits of staking
It is important to note that staking is also vital to the security of PoS blockchains. Therefore, these blockchains come with fail-safes and stake-slashing configuration to ensure that validators who are malicious and do not have the best interests of the network at heart will get punished.
In short, the staked assets are at risk once the network suspects that a validator allowed double-spending or allowing a second transaction with previously-validated data. Moreover, locking up funds in a smart contract might be susceptible to bugs. So you have to make sure that you are using a reliable staking platform.
Anyone engaging in staking crypto must also be aware that crypto assets are volatile in nature. This may possibly affect your staking rewards. Also, once you have staked your crypto assets, you cannot withdraw them. This limits your ability to exit from a depreciating asset.
Having said that, staking also presents good benefits for token owners. Firstly, staking increases the utility of the token. Aside from typical crypto use cases like digital payments and in-game purchases, staking means additional usage, particularly for network governance.
Almost anyone can join staking as no expensive equipment is needed to set in motion. With this in mind, the platforms offering staking services are usually simple and easy-to-use, making it ideal to even those who are just new to the cryptocurrency world.
Furthermore, staking reduces sudden dumps and price falls. Since if cryptos have been staked, these will be put out of the circulating supply of the coin. With a more controlled supply in circulation, any irregular price movement is certainly avoided.
Saving the best for last, staking seems ideal as it qualifies as an effective manner for passive income. Generally, stakeholders receive staking rewards. The amount will depend on certain factors. Even so, getting something in return for temporarily storing your funds for the greater benefit is a good deal.
How does staking crypto make money?
Despite being an economical way to earn an additional profit, staking will not make you rich overnight. The extra money from your locked cryptocurrency holdings will increase eventually, similar to how traditional banking interests happen.
Answering the question if staking is profitable, indeed it is. Generally speaking, there are three ways to generate revenue by staking.
The chosen network will calculate the staking rewards. Earnings will depend on these calculations. In light of this, the reward rate differs per protocol and delivered straight to a user through an on-chain transaction.
Factors for calculating staking rewards include how many coins are staked, how long the token holder or validator has been actively staking, how many coins in total are staked on the network, and what is the inflation rate or percentage of price change over a specific period of time.
As mentioned above, crypto users can also delegate a part of their stake to a validator, eventually creating a staking pool. Within staking pools, a larger stake is also created among participants, increasing the odds of being chosen as the next block validator. This will then also boost the likelihood of getting higher staking rewards.
Accordingly, the staking rewards will be distributed to those that contributed to the staking pool. This reward can either be automatically enforced by the protocol or depends on the agreed-upon condition with the validator.
Users can run their own nodes and become validators if they qualify for hardware requirements and software protection, among other components. More so, validators are ranked and rewarded in accordance with their total stake. For this reason, nodes are incentivized to validate the network on a return on investment (ROI) basis.
In detail, there are two common validator selection methods. Coin Age Selection depends on how long the tokens have been staked for while Randomized Block Selection chooses validators based on low hash rates and high stakes.
How do you start staking crypto?
Now that we clarified what staking is and how it works, you may now consider doing staking yourself. Before you get started, it is important to bear in mind the coin’s maximum supply and use case.
A fixed maximum supply will ensure that the coins in circulation are limited, maintaining a healthy demand for the crypto. As a result, this can boost the price as the demand for the cryptocurrency increases. Make sure that the coin you are staking has useability.
All things considered, you can now choose which third-party service you can use for staking: a crypto exchange or crypto wallet. This is the case if you are not capable of running your own node.
Through crypto exchanges
Step 1: Get staking assets
Fund your exchange account with one of the crypto assets that are eligible for staking.
Step 2: Select an asset to stake
After purchase/deposit, choose which available assets in your wallet are you going to stake.
Step 3: Earn staking rewards
Depending on the exchange guidelines, you will receive rewards from your staked assets.
Through crypto wallets
Step 1: Choose a coin to stake
Decide which PoS coins you want to stake. Below, check out the most profitable staking coins.
Step 2: Download the crypto wallet
This crypto wallet will store staked funds. We have also listed some of the best staking wallets.
Step 3: Determine the minimum stake requirements
Some coins have a mandatory amount to be staked while some have no required minimum.
Step 4: Start staking
After setting up your wallet, you can begin the staking process. Make sure to monitor regularly.
Best staking coins 2020
Obviously, the choice of which coin to stake is crucial. Typically, this may be influenced by the historical returns as well as the functionality and development expectations of the coin’s blockchain. It is also important to know whether your stake is subject to a lockup period or not.
In summary, the best PoS coins for staking are XTZ, ATOM, ADA, Algorand (ALGO), and Harmony (ONE).
Tezos is a self-amending open-source platform for digital assets and applications. It addresses blockchain adoption barriers such as smart contract safety, long-term upgradability, and open participation.
|Lock-up Period||Roughly 5 weeks||14 days|
|Required Collateral||1 XTZ||8,000 XTZ|
*Note that bakers are the validating nodes responsible for confirming Tezos’ transactions.
Cosmos is a blockchain-based system of independent parallel networks. BFT consensus algorithm powers this project. The Cosmos Hub launched on the Cosmos Network with its native staking token ATOM.
|Lock-up Period||21 days||21 days|
|Required Collateral||0.01 ATOM||–|
Cardano claims to be the first PoS blockchain platform, founded based on peer-reviewed research. Not to mention developed through evidence-based methods. It aims to build a sustainable future to help people work better together and trust one another.
There is no lock-up period specified for staking ADA. Thus, users can un-stake their coins at any time. When operating a staking pool, those who pledge more staked ADA get more rewards.
*Running a staking pool means combining staking power for bigger staking rewards.
Algorand is the world’s first open, permissionless, and pure PoS blockchain protocol. Led by Silvio Micali and his team of experts, it provides security, scalability, and decentralization. It specifically powers complex applications.
|Required Collateral||1 ALGO|
Harmony is a fast and secure blockchain for decentralized applications (DApps). Its Effective Proof-of-Stake (EPoS) reduces centralization while supporting stake delegation, reward compounding, and double-sign slashing.
|Required Collateral||1,000 ONE||10,000 ONE|
Where to stake your crypto?
As mentioned already, those who have less technical background can opt to use a staking service provider rather than running their own validator node. However, keep in mind that a provider will usually charge a percentage fee from the rewards earned.
Best crypto staking platforms
- Binance: supports locked staking for selected PoS coins and DeFi staking
- Coinbase: supports staking for ATOM and XTZ
- KuCoin: supports soft staking for various cryptocurrencies such as ATOM, XTZ, TRX
- Kraken: supports staking for cryptos (DOT, ATOM, XTZ, XBT) and fiat (EUR, USD)
- Poloniex: supports staking for ATOM, TRX, WIN, BTT, and TEND
Best staking wallets
- Atomic: supports staking for XTZ, ATOM, TRX, ONT, NEO, KMD, ALGO, and VET
- Guarda: supports staking for NEO, ONE, ATOM, XTZ, ADA, CLO, TRX, ONT, and KMD
- Huobi Wallet: supports staking for TRX, IOST, ATOM, IRIS, IOTX, ADA, and LOOM
- AirGap: supports staking for ATOM and XTZ
- Ledger: supports staking for XTZ, TRX, ATOM, and ALGO
- Trust Wallet: supports staking for TRX, VET, TOMO, XTZ, CLO, and IOTX among others
- Exodus: supports staking for ALGO, ATOM, XTZ, and VET
Staking in DeFi
In terms of DeFi, you can also observe the concept of staking. In fact, the total value locked (TVL) of the DeFi market has reached $11 billion, as of October 15, 2020. More so, compared to PoS networks, in DeFi, infrastructure service providers such as staking pools and Staking-as-a-Service providers run nodes for decentralized protocols on behalf of investors.
Overall, Chainlink (LINK), Celo (cGLD), Dai (DAI), Synthetix Network (SNX), and MakerDAO (MKR) are the leading DeFi assets involved in staking. Though compared to traditional staking, yield farming is much more associated with DeFi. This basically involves locking assets on a lending protocol to borrow assets with a certain interest rate.
In theory, DeFi lending is much riskier than staking on PoS coins. This is mainly because some DeFi assets lack smart contract audits, making its security and reliability unguaranteed. Therefore, DYOR when dealing with DeFi, and crypto assets in general, should be done.
Read more here: What is Yield Farming?
Staking Revolution: Ethereum 2.0
Many believe that the production of blocks through staking enables a higher degree of scalability for blockchains. For this reason, the Ethereum network is working on migrating from PoW to PoS through its mainnet upgrade referred to as Ethereum 2.0 (ETH 2.0).
Ethereum’s anticipated release of phase 0 (beacon chain) expects to happen in 2020. This is the next big milestone for staking and DeFi. As a matter of fact, their PoS protocol has already undergone various dress rehearsals. The most recent ones being Spadina and Zinken.
With the ETH 2.0, anyone can operate as a PoS validator and staking can be done with a minimum threshold of 32 ETH, with an ROI of around 4–10%. As such, a growing interest in ETH staking is evident prior to the network’s switch to PoS.
With the introduction of ETH staking support, increased competition between DeFi lending and staking yields would also occur. This will depend on the investors’ option to choose the most lucrative method of their choice.
Once again, to answer the question “what is staking?”, it simply means locking one’s asset to participate in transaction validation processes.