What is Crypto Staking?
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Not all blockchain networks support staking, neither can all coins be staked. Blockchains that support staking are based on the Proof-of-Stake consensus mechanism. What does Proof-of-Stake mean, then, and why is it special?
The Concept of Proof-of-Stake Explained
The first and most prominent cryptocurrency, Bitcoin, relies on a blockchain network that functions primarily as a bank ledger— confirming transactions and updating the information on the network. Bitcoin utilized a Proof-of-Work mechanism to validate transactions and secure the network.
Numerous computers race against themselves to solve mathematical problems. The first computer that finds the solution confirms the transaction and is rewarded with bitcoins for the work. While the PoW mechanism has largely worked, increased adoption of bitcoin and increased difficulty of the math problems have presented a computational and environmental challenge.
Bitcoin is a much simpler network than most blockchains today, which can support decentralized applications and smart contracts. Ethereum, the first smart contract enabled blockchain was built on a PoW mechanism. Complications, however, began to arise with the increase in the number of transactions, leading to congestion and, ultimately, exorbitant transaction fees. Essentially, PoW could not work for networks expecting mass adoption without endangering the whole planet and coming at a high energy cost. The solution was to build a better consensus mechanism— Proof-of-Stake.
Proof-of-Stake requires validator nodes to commit a certain amount of cryptocurrency to the blockchain. The vested coins are then put to use, as the network assigns transactions to these ‘stakes’ and they ensure the security of the system, confirming transactions round the clock. The blockchain issues the node a reward for every validated transaction.
While these represent the general concept of the PoS consensus mechanism, how do they apply to the average crypto user?
How Staking in Crypto Works
By now, you understand the Proof-of-Stake concept. So, how does staking help you earn in crypto? When you make a fixed deposit in a bank, the bank uses your money to do business and pays interest on your deposit. Staking in crypto follows a similar route— the blockchain puts your vested coins to work and pays you a fixed interest on your deposit throughout the staking period.
Let’s take Binance Coin (BNB) as a case study. The Binance Smart Chain uses a Proof of Staked Authority consensus (Delegated Proof of Stake), which allows regular crypto owners to join the stakes of a fixed number of 21 validators. By staking BNB in the pool of a validator, you earn staking rewards for every transaction completed by that validator proportional to your vested coins. Each validator promises a fixed APR on stakes. If you stake 10 BNB in a pool that promises an APR of 6.91%, your stake will earn a reward of 0.691 BNB annually.
Advantages of Staking
Staking your crypto is much more preferable than leaving it idle in your wallet, although some blockchain networks distribute rewards for holding coins. Here are a few benefits of staking digital assets:
- Staking allows you to earn passive income in the form of staking rewards. You can earn crypto for doing nothing— a case of letting your money work for you.
- Staking helps to secure and validate the blockchain. A less secure blockchain will mean loss of your funds or other negative occurrences. When you stake, you secure your assets better.
- Staking allows you to participate in governance. Users who stake their crypto are allowed to participate in decision-making vision making in the ecosystem.
Risks of Staking
Staking, of course, comes with its risks and disadvantages.
- If you run a validator node, you can lose a portion of your stake if the network suspects you of any misconduct, or you fail to approve a transaction.
- Crypto prices are constantly fluctuating. If you lock your crypto, you cannot unlock it until the vesting period is due, hence you can’t sell when prices are falling. Also, if there is a significant price drop, even the interest earned on the stake will be insufficient to cover your losses.
Which Coins Can You Stake?
Not every cryptocurrency supports staking. Some notable coins you can stake to earn interests include:
- Ethereum (ETH) in the ETH 2.0 network.
- Solana (SOL)
- Cardano (ADA)
- Tronix (TRX)
- Binance Coin (BNB)
- IoTeX (IOTX)
How Can You Start Staking?
To participate in staking, you can either choose to run a validator node on a blockchain that uses the PoS mechanism or join a staking pool and put your coins to work.
- To run a node, most networks require the validator to own and stake a minimum amount of the native coin— Ethereum requires 32 ETH. Also, the node must be up and running at all times, as any downtime will lead to a slashing event— your stake will be reduced if you fail to confirm a transaction.
- Running a node can be stressful, best fit for organizations with a good amount of resources. For regular people, the best option is to join a staking pool and earn rewards according to the proportion of your stake. Exchanges like Binance and Coinbase support the staking of specific cryptocurrencies.