What is staking in cryptocurrency: A Beginner Guide

Last Updated on February 4, 2021 by Ruholamin Haqshanas

2020 was a year when people realized the profitability of staking. The business saw a consistent rise and a periodic surge in the number of clients staking in cryptocurrency to acquire fixed revenue. 

In fact, more than a billion dollars worth of crypto has been staked in Kraken’s platform alone. Moreover, Binance, Huobi, and other significant platforms also hold high numbers of staked crypto. 

The total amount staked in the DeFi in January 2021 adds up to $21-$23 billion. That is a genuine demonstration of the interest, popularity, and profitability of staking.

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What Is Staking In Cryptocurrency – What is staking?

Staking is very similar to mining; both are used to verify transactions. However, there is one central difference in how they do this. 

The difference is that mining uses a proof-of-work mechanism to verify transactions while staking uses a proof-of-stake mechanism.

Both mechanisms do verify transactions. Nevertheless, proof-of-stake is a much more energy-efficient method and does not require powerful computing systems to solve mathematical problems.

In other words, staking is an activity where a user locks his funds in a cryptocurrency wallet to collaborate in performing the operations of a proof-of-stake (PoS)-based blockchain system. 

It is similar to crypto mining in the way that it helps a network achieve consensus while rewarding users who participate.

For the most part, you’ll be able to stake your coins directly from your crypto wallet, such as Trust Wallet. 

Furthermore, many cryptocurrency exchanges offer staking services to their users. For example, Binance and Coinbase let their eligible users earn rewards by staking. All you have to do is hold your coins on the exchange.

To improve your grasp of staking, you’ll first have to know how Proof of Stake (PoS) works. 

What is Proof-of-Stake (PoS)?

Proof of Stake (PoS) idea expresses that an individual can mine or approve block transactions depending on the number of coins that person holds. 

This implies that the more cryptocurrency a staker has, the more mining power he will have and the more he will get rewarded.

Proof of stake is proposed as an alternative to the commonly-used mechanism in bitcoin, proof of work.

Proof of work is the mechanism that permits transactions to be assembled into blocks. At that point, these blocks connect to make the blockchain.

In simpler terms, miners race to solve a complex mathematical problem, and whoever settles it faster gets the option to add the next block to the blockchain.

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Proof of work works perfectly fine, except that it needs a lot of computing power to solve complex problems. And the purpose of all these complex problems is, solely, to keep the network secure.

That is why people started to search for a more energy-efficient method to keep the network safe: Proof of stake.

The principle behind this mechanism is that members can hold coins (stake), and at times, the protocol arbitrarily gives the privilege to one of the stakers to approve the next block. 

Commonly, the likelihood of being picked is corresponding to the measure of coins – the more coins secured, the higher the odds.

This way, the factor behind more earning (rewards) is not based on more powerful computing devices or hash rate, but dependent on how many staking coins someone has locked.

The proof of stake mechanism used in staking also improves the scalability. That is why Ethereum 2.0 is planning to use PoS instead of the common PoW mechanism.

What is Delegated Proof of Stake (DPoS)?

Delegated proof of stake (DPoS) is an alternative version to the Proof of Stake agreement that depends upon a gathering of representatives to approve blocks instead of all hubs in the network.

It works using witnesses who create blocks. Witnesses are chosen by partners at a pace of one vote for each offer per witness. 

Nonetheless, with PoA, the assignment of authority is automated, implying that there can be no preference or lopsided interaction brought about by unequal stakes. 

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The DPos was first used as a part of the BitShares blockchain, but soon after, other networks started to adopt it too. These include Steem and EOS, which were also built by Larimer.

DPoS permits clients to submit their coin balances as votes, and the more coins a client holds, the more voting power he would have. 

These votes are then used to choose various representatives who manage blockchain for their electors, guaranteeing security and consensus. 

Mainly, the rewards are distributed among these chosen representatives. Then, these representatives share a portion of their reward with the electors who voted for them.

This way, a consensus can be reached with a lower number of validating nodes. Thus, we will have higher network performance and lower computing powers needed.

What Is Staking In Cryptocurrency – How does staking work?

It is really simple. 

Once you have the minimum required balance, a node deposits that amount of cryptocurrency into the network as a stake. 

The more your balance, the greater chances of your node being chosen to create the next block. Thus, more balances offer more potential rewards.

If your node is chosen to create a block and it successfully does that, you will receive a reward.

If validators try to scam or fraud the network by double-sign or other malicious acts, they might lose their locked balance.

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How are staking rewards calculated?

There isn’t a specific method for calculating staking rewards. However, these factors have the biggest effects on the amount of reward:

  1. how many coins you are staking 
  2. how long have you been actively staking
  3. how many coins are staked on the network in total 
  4. the inflation rate

There may be networks where rewards are determined as a fixed percentage. 

What is a staking pool?

The idea behind the staking pool is completely the same as the idea behind the mining pools.

In a staking pool, multiple stakeholders join their computational resources to enhance their chances of being rewarded. 

In other words, they combine their staking power in the process of validating new blocks, so they have a higher possibility of earning the block rewards. 

Usually, a staking pool is controlled by a pool operator and the stakeholders who join the pool have to lock their coins in a determined wallet address. 

Some pools may ask their users to stake coins with a third party; however, many other staking pools allow stakeholders to participate in staking power while still keeping their coins in a personal wallet.

However, you should know that in a staking pool the rewards are split among stakeholders with respect to their share. Thus, there will be smaller rewards than solo staking.

Besides, most pools will charge fees, which will reduce the final payout even more. But the fact that staking pools allow stakeholders to make a passive income without having to worry about the technical terms makes it worthy.

What Is Staking In Cryptocurrency – Best staking coins 2021

You can stake on different coins. But to ease your work, we have compiled a list of the best staking coins for 2021.

1. Tezos (XTZ)

Tezos (XTZ) is a blockchain network linked to a digital token called tez or tezzie. Tezos is not based on the mining of tez. Instead, token holders receive a reward for taking part in the proof-of-stake consensus mechanism.

To stake Tezos you should have around 8,000 XTZ which is called a full roll of XTZ. 

Users also need to run their own full node. Since this is a little hard for everyone, many third-party stakers have grown, allowing users to invest their XTZ and receive rewards. 

In return, the third-party baker takes anywhere from 0% to 25% of the staking rewards. Depending on what staking platform you use, you can expect returns from 5% to 6% annually.

2. Ethereum 2.0

Ethereum 2.0 is an upgrade to the massively-used Ethereum blockchain. The upgrade intends to improve the speed, efficiency, and scalability of the Ethereum network to process more transactions and ease bottlenecks.

The ethereum 2.0 update is expected to increase the transaction limit from 15 per second to 100,000 transactions per second. 

That is why ethereum and ethereum 2.0 are considered valuable coins for staking.

To stake on ETH 2.0, you need to own a minimum of 32 ETH, as well as the Eth1 main-net client. 

Much of Ethereum 2.0 growth is attributed to the huge potential rewards that yield farming protocols operating as ERC20 tokens offer. The current annual reward rate for staking Ethereum 2.0 is 11.0%.

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3. AdEx

ADX token —an ERC20 token— is the official cryptocurrency of the AdEx platform — a decentralized advertising network. 

On the AdEx platform, ADX tokens are used to make transactions such as buying, selling, and bidding for advertisement space and time.

It selects and encourages validators to process micropayments between publishers and advertisers for each campaign. 

Staking ADX tokens via on the AdEx platform presents governance over validators, allowing better transparency, security, and decentralization to ensure successful campaigns. 

That way, stakers can participate in a real-world ad network while earning both DAI and ADX as a reward. 

Unlike other systems, reward distribution comes without inflation of the ADX token, facilitated by the organic ad campaign payments, encouraging longer-term staking periods.

The current annual reward rate for staking AdEx is 60.0%, with 24.7% of the circulating token supply currently staked.

4. NEO

NEO is an open-source blockchain decentralized platform founded in 2014 by Da HongFei and Erik Zhang. 

The project Antshares in 2017, the project’s vision is to realize a “smart economy” by utilizing blockchain technology and smart contracts to issue and manage digitized assets.

For staking NEO, there is no minimum required amount. The expected returns are about 2-5% per year and are paid with Gas tokens.

5. Cosmos

Cosmos is a network of blockchain networks. See, the name “Cosmos” now makes sense.

Developers call this concept an “Internet of Blockchains.” This project aims to allow separate blockchains to communicate with each other seamlessly.

ATOM is the native cryptocurrency of the Cosmos network. One of its main functions is that it is used to execute smart contracts and complete transactions. 

New ATOMs are generated as rewards for network validators every time a block of transactions receives approval.

That is why the cosmos is one of the best cryptos for staking. The current annual reward rate for staking ATOM is 9.23%, with 63.7% of eligible tokens currently staked.

6. VeChain

VeChain is a blockchain-based platform that records the truth of what happens at every stage of the supply chain. 

In other words, it is used to enhance supply chain management and business processes. It aims to streamline these processes and data flow for complicated supply chains using distributed ledger technology (DLT).

The main goal of VeChain is to prevent fraud and increase transparency by combining physical tracking with blockchain records to keep tabs on real-world products from production to delivery.

You can stake this coin and be paid depending on your holding amount in the Ve Thor (VTHO) token.

7. Synthetix 

Synthetix (SNX) is an Ethereum based project mainly used to create synthetic assets that are linked to the value of some other asset. 

These synthetic assets can be based on physical commodities, fiat currencies, stocks, bonds, other cryptocurrencies, or anything valuable. 

Each synthetic asset created is an ERC-20 construct and is backed by the Synthetix Network Token (SNX).

Staking new Synths is a straight-forward process, and is accomplished by locking SNX tokens in a smart contract as collateral. 

A 750% collateralization ratio has been set to allow for fluctuations in the value of SNX and Synths. 

Any time the collateralization ratio falls below 750% the user is unable to collect fees generated by Synth transactions, thus incentivizing users to maintain a minimum 750% collateralization ratio.

Wrap Up

Staking is one of the best ways to make a passive income with cryptocurrency. Staking is very similar to mining except that is easier and affordable.

In staking, you hold and lock an amount of your coin and validate transactions. The more coin you lock, the greater will be the chance of you being chosen for the reward.

The amount of reward is dependent on the coin, the amount you lock up, the time you assign, and even more factors. So, there isn’t any exact number to say.

You can stake different coins. Here, we suggested the 7 best coins that have the best potential for long-term returns.

What Is Staking In Cryptocurrency FAQs

What Is Staking In Cryptocurrency FAQ’S

How do you start staking Cryptocurrency?

You can start staking in these simple steps:
1. Choose a coin to stake. There are a lot of PoS coins available on the market. We have also suggested 7 of the best ones in this article.
2. Download the wallet. Go to the website of the coin you want to stake and download a software wallet to lock your coins in it.
3. Determine the minimum requirements.
4. Decide what hardware to use. You need to find a validator (staker) to be connected to the network 24/7.
5. Start staking.

What is staking in Crypto?

Staking in crypto is simply validating transactions in a proof of stake mechanism. It is an energy-efficient alternative to common mining. As you validate transactions, you will earn rewards.

Is crypto staking profitable?

Yes, of course. Staking is somehow more profitable than mining because you will need to use less energy to stake.

Is staking safe?

Staking and, in general, all cryptocurrency investment involves a high level of risk and there is always the possibility of loss. However, compared to other investment types (CFD trading, Options trading) it is much safer.

Can BTC and XRP be stacked?

No. These coins have no incentivized staking model.

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