Home Tech Cryptocurrency Important Things to Know About Cryptocurrency Staking

Important Things to Know About Cryptocurrency Staking

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Crypto staking describes the process in which shares in a cryptocurrency are made available to a network to ensure its security and continued existence and to receive additional income in the staked currency. The staking rewards thus represent the financial incentive for users to make their coins available to the network. Between 5% and 20% per year can be achieved through staking, sometimes significantly more. Many crypto investors are making good money from crypto staking. You only need to know the right coin to stake and on which website to do that. You can check out Topiacoin.io for a better clue on that.

In this article, we will go into more detail about staking in cryptocurrency. We will show you how it works and how and where you can stake your coins.

Proof of Work vs. Proof of Stake

If you have been around in the cryptocurrency mining world for some time now, you definitely must know quite some things about the Proof of Work (PoW) consensus mechanism. Here, external parties (miners) have to solve complex puzzles to validate transactions in the network, as well as to generate new blocks and attach them to the blockchain.

In contrast, with Proof of Stake (PoS), this process is no longer carried out by external miners, but by the shareholders of the respective currency themselves. We explain the difference using the following example:

·         Proof of Work example

An entity that controls 10% of the computing power on the network has a 10% chance of generating the next block.

·         Proof of stake example

An entity that holds 10% of all coins and uses them for staking usually has a 10% chance of generating the next block. (Can also fluctuate depending on the currency)

Proof of Stake has many advantages, but compared to Proof of Work, it also has a few disadvantages that should not be ignored. Let’s look at their pros and cons:

Proof of Stake Benefits

The major advantage, which is also often mentioned in the media, is the low energy consumption because staking no longer requires solving mathematical puzzles, but the process can be compared to a lottery – secured by the respective shares in the network.

The second important benefit is that staking makes it relatively easy to generate passive income. The rewards are on average between 5% and 10% annually but can vary depending on the currency.

Cons of Proof of Stake

Low energy consumption and passive income – that sounds almost too good to be true. And it is (unfortunately) that too because PoS also has a few disadvantages that cannot be neglected, which could even endanger the entire system.

On the one hand, there is the risk of a 51% attack. If an entity owns over 50% of the network, it has complete control and can change it at will.

This is not only a problem with PoS but can also happen with PoW. The big difference here is that this is only temporary with proof of work since the computing power only ever depicts the current status and it is not guaranteed that over 50% are permanently checked.

With Proof of Stake, the scenario is a lot different. If an entity possesses, say, 50% of all coins, it owns the same volume of the network and never has to part with it ever. The second disadvantage is that through staking rewards, the rich in theory always get richer, since they have a larger share in the network and therefore receive more rewards in percentage terms. However, it can also be argued that this is also the case with interest rates and a higher proportion also entails higher risk, so the system is fair again.

How to Make Money Staking Crypto

But let’s now turn to the topic that interests you most, namely how to make money with staking. As already mentioned, you can usually get between 5% and 20% in annual staking rewards. For some currencies, this can also be much higher. Here are a few staking rewards from Stakingrewards.com:

  • Ethereum 2.0: 6.03% APY
  • Cardano: 6.63% APY
  • Polkadot: 13:28% APY
  • PancakeSwap: 79% APY (Auto-compound usually over 110%)

Even if high staking rewards sound tempting at first, you always have to remember that higher inflation usually goes hand in hand with higher rewards, as the rewards are usually not completely covered by the transaction costs. Thus, a currency with 5% staking rewards and 4% annual inflation can be a better choice in the long term than a currency that promises 100% annual returns but at the same time entails 200% inflation.

Where can I stake my Crypto coins?

Many ask, where can one stake cryptos? Unfortunately, there is no “size fit all” answer to this question. There are many options and the optimal solution can vary from person to person. To give you an overview, we present the two most popular options:

Staking On Exchanges

The easiest option is offered by exchanges such as Binance, Coinbase, Kraken, etc.

If you already hold your coins with these, you usually don’t have to do anything more than consent to staking (with some this happens automatically in the background).

This process is super easy, and many exchanges have the policy that all rewards are passed on directly to the user without withholding an extra fee.

Another advantage is that Exchanges partially pays for a loss of your coins, e.g. through a mistake in the smart contract or through a penalty for a validator. However, this varies a lot from Exchange to Exchange – so you shouldn’t rely on that.

A disadvantage of this method is that you get the staking rewards, but your voting rights (governance) are held by the exchange and can be misused for your purposes. In addition, not all coins can be staked on exchanges, but often only a small part of what is offered on the exchange at all.

Staking With Your Wallet

The alternative is to take care of the staking yourself and do this directly via the own programs of the respective currencies.

This gives you more freedom, but this is often associated with more effort, since managing the coins yourself is a major technical hurdle for many. In addition, you also have to take care of which staking pool you give your shares to because your shares are often (at least partially) at risk if a staking pool tries to act against the rules of the blockchain.

All in all, everyone has to ask themselves whether the extra effort is worth it.

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