Beginner’s Guide To Cryptocurrency Staking

In response to the innumerable problems caused by Bitcoin’s consensus algorithm i.e., Proof-of-Work (PoW), several alternatives have been in continuous development. Proof-of-Stake or PoS is one of the mechanisms that has gained the highest attention so far.

Proof-of-Stake is a consensus mechanism that does away with the great energy requirements of PoW and replaces it with a staking-based mechanism. In PoW, miners are network participants that provide computational energy to secure the network, and get a reward in exchange. In PoS, the securing mechanism is carried on by ‘Stakers’. Instead of promising scrupulous amount of energy to the network, Stakers secure the network by ‘Staking’ certain amount of network tokens.

Staking is a two-way mechanism wherein the network is secured by users locking tokens to show confidence, in return for which, the stakers are rewarded by the network based on the amount of stake provided.

Let us now see how Staking is done and how one can profit by staking in a network, without the hassles of looking after hardware or any grave complexity.

Staking Simplified - Earning from Giving

Proof of Stake is a consensus method that essentially replaces mining with token ownership. Instead of having to perform complex calculations, a token holder participates in block creation by “staking” their tokens, i.e. keeping them locked in a specific location and not being able to spend them. The staker is then granted a reward, which could take the form of transaction fees or a block reward, based on the new tokens generated for blocks their stake helped create.

Proof of Stake takes away the energy and computational power requirement of PoW and replaces it with a stake. A Stake is referred to an amount of currency that an actor is willing to lock up for a certain amount of time. In return, they get a chance proportional to their stake to be the next leader and select the next block, ultimately gaining the network reward. In essence, one earns rewards by giving or locking funds in a network. You are paid for giving.

The system offers guaranteed returns and a predictable source of income unlike the proof-of-work system where coins are rewarded through a random process with low probability.

Staking is a great and reliable way for investors in the crypto space looking to generate returns, but do not want to get into the hassles of Proof-of-Work.

How to Start Staking?

One of the major benefits for staking coins is that it removes the need for continuously purchasing expensive hardware and consuming energy. 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. Coin staking gives currency holders some decision power on the network. By staking coins, you gain the ability to vote and generate an income.

For those interested in generating an income from staking tokens, there are certain issues worth keeping in mind. Even though staking is relatively easier that investing in PoW based hardware, it still requires a bit of dedication and attention. Readers are asked to keep the following things in mind while attempting to join the Staking sector.

Choosing a Stable and Profitable Network

The most important to keep in mind before locking your funds is to ensure you have chosen a profitable and reliable network to stake on. A good network could be the difference between long-term reward generation and total loss of investment. After settling on a network, it is recommended to begin with minimum amounts, staking rewards, and particular staking protocols. Always remember to pick a project that resonates with you and one that you expect will be around far into the future. After all, by staking, you’re helping to make that project become a reality.

Staking Pools

Staking Pool is formed when several coin holders merge their resources to increase the chances of validating blocks and receiving rewards. They combine their staking power and share the eventual block rewards proportionally to their individual contributions.

Choosing a Staking pool to collectively stake and get rewarded is considered a reliable way to make regular reliable profits. Staking pools can help you generate income without doing much work individually as all responsibilities can either be distributed or delegated. Here’s a list of some of the Best Staking Pools in the market.

Masternode Platforms

Another addition to Proof of Stake is the introduction of Masternodes. Masternodes act as a different type of user in PoS networks. They are often lumped together with regular staking users, but their roles are very different. A Masternode has added responsibilities when compared with a regular Staker. Projects that support Masternode staking such as DIVI, PIVX, etc., place extra responsibilities on their masternodes. They are assigned tasks such as voting, delegation, decision making and so on. It is obvious that with the increased responsibilities, Masternodes are generally paid more than regular stakers.

Cold Staking

Cold staking means that you can start staking cryptocurrencies but hold them on a secure wallet that is not connected to the internet at all times, i.e., a hardware wallet. Cold Staking is much easier and more secure than regular staking. Networks that support cold staking allow users to stake while securely holding their funds offline. However, if the stakeholder moves the coins out of the cold storage, the stakeholder will stop receiving rewards. This method is particularly useful in allowing large stakeholders in the network to ensure maximum protection of their funds while still supporting the network.

As of January 2020, there are only a handful of projects that support cold-staking. Some of them are         

  • DIVI
  • Stratis
  • Nav Coin
  • COLX

Resources for Staking

Following are some of the resources that an Investor might use to settle on a Staking platform and start generating returns

Things to Keep in Mind Before Staking

  • Always ensure that you do sufficient market research before settling on a cryptocurrency network to stake on
  • Ensure that you have a dedicated computer to carry out all your staking activities. The computer should be connected to the Internet and electricity at all times. Disconnecting the device will temporarily remove you from the network, decreasing your reward
  • It is recommended to join Staking pools as they carry a greater chance of winning the network reward
  • Delegate staking rights to pools that have a good track record of making the best decisions for the network.
  • Consult platforms like CoinMarketCap, and other information arbitrators that provide detailed information regarding each project. As explained earlier, choosing a reliable network to stake on is the most important part of staking.

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