Staking is passive income, an alternative to mining. It means keeping a certain amount of cryptocurrency in the user’s wallet (on a cryptocurrency exchange, as an option). There is a reward for this. Works with digital coins with PoS trust algorithm support.
What is staking
Staking – from English staking, retention. The cryptocurrency retention mechanism serves to maintain the proper working conditions of the blockchain chain. It is for this that the validator, the owner of the wallet and cryptocurrency, receives a reward, that is, earns on blocking coins.
Unlike mining, there are no requirements for hardware performance, the main thing is the amount of cryptocurrency involved in staking. The choice of the wallet that receives the so-called block reward occurs at random. The main criterion is the amount of blocked funds, the more assets, the higher the likelihood of receiving a reward.
To store cryptocurrency for profit, not only cryptocurrency wallets are used, but also exchanges. Also, users are pooled to increase the amount of held funds. Accordingly, the profit is divided in proportion to the invested tokens.
Staking works with cryptocurrencies, which are based on the PoS consensus algorithm, as well as its derivatives. In addition, the possibility of staking is implemented in smart protocols, decentralized finance.
Features of the PoS consensus algorithm
Bitcoin works based on the PoW protocol – Proof of Work. Proof of work completed, based on which the next block is added to the blockchain chain. To do this, a certain mathematical problem is solved, for which miners are rewarded.
PoS is an alternative, different way of confirming transactions. The correctness of operations is confirmed by validators – token holders chose by the system. The main criterion for choosing a validator is the number of coins held in the wallet (on the exchange). The PoS consensus algorithm provides greater scalability. As a consequence, Ethereum also plans to switch to PoS, the so-called ETH 2.0.
- DPoS – Delegated Proof of Stake, alternative consensus, delegated proof of stake, process participants vote for validators, receiving their percentage of profit;
- LPoS – Leased Proof of Stake, leased proof of stake, token holders lease their coins to other participants in the process, with a good connection;
- Masternodes – nodes investing large sums, the most reliable option
Features of earning on staking
To make money on staking, you need to block a certain amount of cryptocurrency in your wallet. That being said, there is a minimum threshold set by the cryptocurrency community. For example, Ethereum validators block from 32 ETH, other systems set their limits. As a rule, the more tokens blocked, the higher the profit, the more likely it is to receive a reward.
What matters is the period of holding the amount in the wallet. It can be calculated in days, weeks, and even years. During this time, the owner has no right to use his cryptocurrency, withdraw it and even disconnect the computer from the network.
Each cryptocurrency has its criteria for calculating the staking reward:
- the volume of blocked coins;
- retention time;
- the total number of coins blocked in staking;
- inflation rate;
- other features.
The best option is a cryptocurrency exchange with appropriate support. Delegating your coins to the exchange is more convenient for the user. No need to monitor PC, network status. Cryptocurrency exchanges – PoS cryptocurrency validators:
There is an option to participate in validator pools. They pool their assets, increase the volume of locked coins, increase the likelihood and size of the reward. Profit is paid to each participant in proportion to their share in the pool.
Crypto hardware wallets support cold staking. The user blocks tokens and makes a profit. Hot vaults also support staking passive income.
The main risk in staking is the inflation of a certain type of cryptocurrency. The token can lose value, and all profits are leveled by the exchange rate difference. From this point of view, it is better to choose less risky cryptocurrencies with lower returns.
Blocked cryptocurrency cannot be used for a certain time. Otherwise, the user will not receive a staking reward. This is another negative factor.
Excellent prospects for making money open up when investing in promising cryptocurrencies, as well as classic digital assets that have proven their relevance.
Staking does not imply high returns in a short period. These are long-term investments that have already proven their worth. Staking is a much easier way to make a profit than mining. It is not so demanding on resources, including less energy-consuming.
There is no expensive investment in equipment like in mining. Low entry threshold, simplicity is the advantages of staking.
Prospects for staking are shown by many kinds of research. So, the Staked company predicts the total profit of participants in staking projects for 19 billion dollars in 2021 against 10 billion in the past.