If you are just entering the world of blockchain and crypto, staking is a concept you will see a lot. Depending on how deeply you are ready to dive into the topic, there are different ways to explain the concept.
What Is Staking?
Despite the existing misconception about staking, saying that it’s just the process of locking the assets and earning from the currency growth while you can’t touch them, it’s far from the truth.
In simple words, staking is a process of committing the crypto assets to support a blockchain network and confirm transactions. It is available on the blockchain networks running on the Proof-of-Stake consensus mechanism. Many cryptocurrencies can be staked for a certain amount of time and earn a percentage-rate reward. You will need to send your assets to a staking pool, which can be considered an interest-bearing savings account. The main difference is that blockchain pays back more than a normal bank.
But why would you get rewards just by keeping your money in some account? It’s because the blockchain puts them to work. Staked assets are needed for the Proof-of-Stake algorithm to run, verifying all the transactions on the network. Thus staking doesn’t only bring a passive income to the stakers, it helps to secure a specific blockchain. And that’s why the network itself is paying users.
Proof-of-Stake Consensus Mechanism
To understand the algorithm, we should remember what makes blockchain a decentralized system. There is no central authority, but all the users (or computers in this case) need to agree on the correctness of operations on the network. That’s why they use an algorithm called the consensus mechanism.
The first cryptocurrencies used the Proof-of-Work model, where the computers need to compete in solving complex mathematical equations to add blocks to the network and get rewards. But this way met a lot of criticism for its energy consumption — often computers would solve the same task, overusing the power. Moreover, this method will limit the scaling possibilities.
For relatively simple blockchains like Bitcoin, which works very similarly to the bank ledger and only processes transactions, it won’t play a very big role but for the networks like Ethereum, which has a variable infrastructure running on top of it, Proof-of-Work really becomes the blockage on the way of further development. Because validation will take more time with the increase of projects and transactions, it will slow down each operation and increase the fees.
That’s where Proof-of-Stake appeared with a new approach for transaction validation. It is more energy-efficient and can handle many more transactions, providing higher scalability, while lowering the fees. This became possible because in Proof-of-Stake computers don’t have to solve puzzles anymore, instead, transactions are validated by the people that invested in the currency.
The Role and Process of Staking
So to secure the network in Proof-of-Stake, holders put their assets on the line — in other words, stake, to get a chance to add a new block to the chain and be rewarded. These assets become a guarantee that each new block is correct and every transaction is legitimate.
People who stake their tokens are called stakers. After they put up the tokens, any dishonest action on the blockchain becomes unattractive, because it will lead to the corruption of the blockchain and then to the collapse of the price of the native token used for staking, so each staker will lose money.
When the assets are staked, the network randomly chooses the validators, though than bigger the stake and the longer it is held, the more chances one has to validate the blocks, add them to the chain, and get rewarded. It has a logic because the more of your own money is in the game, the more interest you have in keeping it fair.
Staking Pools
The stakes are often gathered in staking pools, which consist of the tokens gathered from many participants and are delegated to one validator, who runs the node and takes responsibility for the complicated process of validation, and then redistributes the reward according to the input of each participant.
Delegated Proof-of-Stake
The alternative to normal staking was introduced in 2014. In delegated Proof-of-Stake networks, coin holders use their token balances as votes (so the election power is proportional to their holdings) and elect the delegates (validators), who will manage the entire network on their behalf.
Those validators then receive the rewards and redistribute them between the users who voted, accordingly. It allows reaching the consensus with a smaller number of validators, making the blockchain faster and more efficient, but the main disadvantage of dPos is the reduction of decentralization.
Cold Staking
Cold staking is a process of staking from the wallet without an Internet connection. Most blockchain networks require validators to stay online all the time, but a few allow staking from offline hardware wallets. It can be useful for large stakeholders because it will provide them with a high level of security. But once they move the staked assets from the storage, the rewards will stop.
Staking Risks
Each PoS blockchain has its own penalties for validating the wrong block or even going offline. If the validator violated the rules, staked assets will be slashed or even removed in the worst-case scenario. There is often an entry barrier for stakers: for example, on Ethereum 2.0 to become a validator one should stake a minimum of 32 ETH.
The other point that stops users from participating in staking is the lock-in period, during which the assets can’t be withdrawn or exchanged. Though the tokens still belong to the user.
The scariest risk is the possibility of a staking pool getting hacked, so all the money will be gone.
How to Stake Your Assets?
First of all, you will need to get the tokens that can be staked. And then the assets should be transferred to a staking account.
Nowadays, many exchanges allow users to stake the tokens directly on their platform. Otherwise, there are platforms that offer staking as a service and also help to find the best crypto projects to put your money in.
The Best Crypto to Stake
Staking can be a good way to generate passive income as many crypto projects offer quite high-interest rates. Every blockchain protocol is unique and has different parameters affecting staking rewards, and also requirements for participation. It can be the staking amount, bonding periods, the time and frequency of the rewards payouts, commissions for validators, and penalties. Let’s take a look at the most known platforms that offer staking opportunities.
Ethereum 2.0
After the most anticipated in the whole crypto community upgrade from Proof-of-Work to Proo-of-Stake Ethereum 2.0, it will make staking possible for its holders.
To become a validator on Ethereum 2.0 network the users will have to deposit into the official deposit contract address a minimum of 32 Ether. The users can participate in the Staking Pools but are not allowed to delegate. Each validator must run a node client to get access to verifying the transactions.
To accelerate the process Ethereum will use sharding — the network will be divided into 64 shards, each of them ran by the validator, so the validation requests will be spread among them. The rewards will vary depending on the size of the stake and can reach 5%.
Cardano
A third-generation blockchain, built to run smart contracts, Cardano allows staking its native ADA token to provide security. The users can either delegate the stake or run a Staking Pool.
Delegation doesn’t require anything and allows ADA holders to lock their money up in the Staking Pools through Daedalus or Yoroi wallet. Stake Pool operators though have to run with a consistent time to keep the network secure.
Cardano uses the game theory to choose the stake pool that will create a new block, though the chances to be chosen increase with more ADA tokens staked.
Time is divided into five days long “epochs”, and each of them contains 420 000 slots. For each slot, the network chooses a slot leader and then redistributes the rewards between validators after each epoch. Validators then redistribute it to the delegators according to the amount of ADA they staked 25 days before the end of the cycle. So the rewards will vary from 4% (for a staker) to almost 8% (for the validator).
EOS
The network is somehow similar to Ethereum as it also supports decentralized programs. The users can stake their native EOS tokens. The network follows the Delegated model of staking with 21 eliminated delegates. All the cryptocurrency holders can vote for electing the delegates, with the value of each voice depending on the number of tokens staked (only staked tokens affect the voting power). Delegates are re-elected and can be dismissed if not following the rules.
The annual yield is 3.2%.
Solana
Solana was created for deploying smart contracts. It allows staking its native SOL token as a delegated staker or a network validator. In the first case, the user needs to delegate the tokens to a stake pool using a wallet that supports Solana, while the validators need to run and maintain a validation node. Delegators pay some commission to help validators to cope with the maintenance cost. If the validator shows a poor performance or acts maliciously its assets get slashed.
Together with PoS, Solana uses a different consensus mechanism called Proof-of-History, which allows it to add blocks every 400 milliseconds. The algorithm for choosing the validators here is the same, but validators can set the maintenance commission by themselves to attract more stakers and compete with other validators.
The yield in Solana is adjustable and changes depending on the amount of the SOL tokens staked and also the total supply. On average it is about 6% for the delegated stakers and around 10% for the validators (they can choose the percentage).
Tezos
An open-source smart-contract network for the creation of new tokens and running dApps. The holders of its native XTZ token can participate in staking, committing their tokens to become a validator. Staking over 8000 XTZ provides the user with voting rights and allows to participate in the network governance.
Tokens delegation is allowed on Tezos, so even the users with less amount of XTZ staked can participate in governance. To start earning from staking on Tezos, one has to wait the first 21 days for the stake to become eligible for rewards and then another 15 days to get the reward. After that, the rewards are paid after each cycle which normally lasts 3 days.
The APY varies depending on whether the user is a solo staker (gets 8%) or delegates the tokens (5-6%). The validation process on Tezos is called “baking”. There are also users that validate the blocks added by bakers and they also get rewarded up to 2 XTZ for verification.
Polkadot
On the Polkadot network, users can be either validators (adding the blocks) or nominators (checking the work of validators). The validators have to stake a minimum of 350 DOT and run the node, which requires launching a cloud server on Linux, while for nominators there is not even a minimal amount of native DOT tokens to participate. Though, the max amount of nominators can’t exceed 22,500.
Staking rewards are accumulated each era (24-hour period) and after each one, you can get rewards for the previous one. Staking returns on Polkadot can reach up to 14%, though validators can change their commission at any time. Moreover, only the top 256 nominators of each validator are getting paid at the end of each era.
The rewards are split equally between validators, but each of them can be awarded for good actions on the network. They also receive tips from the users transacting DOT. Altogether, the annual yield of the validator can be higher than 100%.
Cosmos
The Cosmos network presents itself as the Internet of Blockchains and seeks to bring many blockchains together and make them interoperable.
It allows users to stake native ATOM cryptocurrency, becoming delegators or validators. Validators get rewarded for confirming the transactions and then redistribute the rewards to the delegators according to the amount of stake.
The users have to pay a fee each time they want to stake or unstake the assets or claim the rewards. A small amount of ATOM will be locked in the wallet for future fees. Once deposited to a pool, the coins can’t be returned to the wallet before 21 days pass.
The other significant feature of the Cosmos network is the “Hard Slashing” model of punishing the validators for going down and performing fraud.
The typical APY of the Cosmos network (according to its official website) is 9.7%.
