Understand what’s at stake with Staking and how to join this new crypto craze.
What is Proof-of-Stake (PoS) and how is this different from Proof-of-Work (PoW)?
Before introducing what is staking, we decided to do a quick reminder about what are Proof-of-Stake (PoS) and Proof-of-Work (PoW), the two most famous ways to validate blocks in a blockchain.
Proof-of-Work: It’s a consensus mechanism that is used to decide which user is eligible to create a block. For an actor to be elected as a leader and choose the next block to be added to the blockchain they have to find a solution to a particular mathematical problem.
For example, Hashcash Proof-of-Work is used in Bitcoin mining.
To participate in the network and earn mining rewards, miners need computing power using CPU, GPU, FPGA or ASICs which is expensive and energy consuming.
Proof-of-Stake: Recently, an alternative to PoW has been making many headlines, as Ethereum is planning to make a transition (Casper) this year from PoW to PoS.
Proof-of-Stake is a method for determining which users are eligible to add new blocks to the blockchain, and thus to earn rewards. Using this method, you don’t need lots of computing power and energy but only need to hold some token and stake them.
So to resume the situation simply, in the Proof-of-Work method, eligibility is determined by computing power, and not by the ‘miners’ digital wealth as in Proof-of-Stake.
What is Staking?
So as you understood, by using Proof-of-Work you can earn mining rewards and with Proof-of-Stake cryptocurrencies you can earn staking rewards also called minting rewards, interests or crypto dividends.
Basically, the block proposers are not selected by solving mathematical problems but depending on the size of their stake, i.e. how much coins they own. A number of your coins are used for staking and you get a certain percentage of your coins as a reward.
“The process is similar to a lottery in which the number of crypto coins you hold is equivalent to holding a given number of lottery tickets. Staking systems can also allow delegation in which each individual delegates their voting rights and earned income to a trusted party. Those delegates then earn all the rewards for block validation and pay their loyal supporters some form of dividends in return for their vote.”
For example, if someone has 10% of the tokens, he is selected as the next block proposer with probability 0.10.
How & Why should you stake your token?
So basically how is it working? In PoS, anyone can join the network but you will need three things to become a validator by your own:
- IT & cybersecurity skills: You need to know how to deploy a node and have some cybersecurity knowledge to secure your node and your funds properly.
- There are capital requirements used as security collaterals on most protocols. For example, on Tezos, you need at least 10K XTZ (soon 8K), on Loom: 1 250 000 LOOM, on TomoChain: 50K TOMO, on Waves: 1 000 Waves…
- Finally, need to have free time to set up everything, keep the systems up to date, and fix bugs when/if they appear
If you don’t have these don’t worry, you can still benefit from the protocol inflation. But how? Simply by finding a Staking-as-a-Service company such as POS Bakerz that will redistribute most of their rewards.
The easiest way to find staking services is to use the different block explorers or to use a 3rd party website such as stakingrewards.com.
We highly advise you to conduct your own research when selecting your staking provider. At POS Bakerz, we are currently supporting 3 cryptocurrencies: Tezos, Cosmos, and IRISnet and we plan to add more in the future.
By putting your token at stake, your main benefit is enjoying the “crypto dividend” you will receive each cycle, and see these rewards grow in time.
At the moment, using POS Bakerz, you keep 98% of the inflation rewards and, as payments are made directly on your delegating address, you can benefit from compounding.
Depending on which services you are using, you can also participate in the protocol governance. At POS Bakerz, the opinion of our delegators is highly valuable and we poll their point of view any time before voting on a proposal.
Note: With PoS, you retain full ownership of your tokens while staking, and validators cannot send or transact with your tokens under any circumstances. You are responsible for keeping your own tokens secure and you keep custody of your funds.
Recently, staking has gained interest among investors and crypto companies as Coinbase recently announced their support for Tezos and staking for institutional and Trust Wallet added Tezos to their wallet and soon staking.
It also becomes easier for people to delegate their PoS cryptocurrencies, and more and more wallets are now proposing staking directly from their wallet. For example, if you are looking for a simple solution to stake different PoS cryptocurrencies you can have a look at Wetez Wallet.
What is “Crypto Dividend”?
Staking is similar to earning interests or dividends. As it makes it easier to understand the concept, from now on, we decided to use crypto dividend when referring to Proof-of-Stake rewards. According to a Bloomberg article, staking can be considered by many investors as a method of “playing it safe”. Indeed, regardless of market conditions staking offer a return/crypto dividend on the crypto being staked.
For investors who HODL their crypto in the long term, it makes a lot of sense for them to earn a crypto dividend on their holdings and to let it compound over time:
- Earn consistent “risk-free” rate of return on a given cryptocurrency
- Avoid having the position diluted by inflation
- Contribute to securing the underlying blockchain network
How much rewards can you earn on PoS protocols?
Depending on which PoS cryptocurrency you hold, crypto dividends can vary from ~5% to more than 100%.
Here is a table published by Messari, a crypto news and research company.
But staking is not the gold rush! If you want to operate your own staking activities, it involves a high degree of risk in terms of both Investment and IT. In case you choose to delegate your tokens, you must conduct your due diligence and keep monitoring your validator to verify that it keeps strong uptime. Furthermore, by holding cryptocurrencies you are also exposed to the high volatility.
Looking for a trusted operator to stake your PoS cryptocurrencies?
Try out POS Bakerz and enjoy only 2% fees and automatic payouts at the end of each cycle: https://posbakerz.com/
*DISCLAIMER: This is not financial advice. Staking and cryptocurrencies investment involves a high degree of risk and there is always the possibility of loss, including the loss of all staked digital assets. Additionally, delegators are at risk of slashing in case of security or liveness faults on BPoS protocols. We advise you to DYOR before choosing a validator.