Staking is the act of posting certain crypto assets as collateral to participate in the operation of a blockchain. As compensation for locking up holdings, users receive regular rewards in a manner similar to interest payments.
You have probably heard how major cryptocurrencies, most notably bitcoin, rely on a Proof-of-Work (PoW) consensus mechanism to validate new blocks on a blockchain. Under a PoW setup, miners compete to solve complex mathematical problems for the right to add a new block and earn rewards. The current reward for a new block added to the bitcoin blockchain is 6.25 BTC
BTC
, worth about $137,687 based on current prices.
How Proof Of Stake Is Different Than Proof Of Work
Although PoW has not proved invulnerable, especially for smaller blockchains, it has protected the security of major blockchains such as bitcoin, ethereum, litecoin and many others as they have grown. That said, it does come with some tradeoffs, most notably the high cost of mining (both in equipment and electricity). As bitcoin grew, mining became so competitive that only dedicated industrial-size outfits are able to be competitive. Plus, according to some estimates, the daily average energy usage for maintaining the bitcoin network rivals that of a mid-size country, causing concern among those worried about the climate. Finally, PoW networks have throughput bottlenecks that limit their ability to scale moving forward.
The alternative Proof-of-Stake (PoS) mechanism was introduced to address these challenges. Most notably, rather than competing against each other to mine blocks, validators are selected based on the amount of stake. This can lead to a fairer and more equal distribution of rewards. Additionally, because these networks are not as energy intensive, which is necessary under PoW as a disincentive to bad actors, PoS networks are far more scalable. For instance, Ethereum’s current setup can handle a little more than a dozen transactions per second. Once its transition to PoS is completed in a couple of years that will scale to 100,000.
That said, please note that PoS consensus mechanisms are not homogenous and each blockchain network may use a different way of calculating staking rewards, taking into account various factors such as:
- Minimum staking requirements
- Lockup periods
- Payout schedules
- Reward amounts
How Is Staking Relevant For You?
For most of bitcoin, and crypto’s history, investors did not have the opportunity to earn passive income on their holdings. They just had to hope for price appreciations in the spot market. Additionally, aside from very early adopters or investors with a high degree of technical sophistication, mining was not a viable option to generate additional funds.
Staking changes the discussion. Now, if you are a long-term holder of certain assets you can pledge them to a network as collateral and earn rewards (ranging between 0-20%) depending on the asset.
What Assets Are Available For Staking?
The staking data provider Staking Rewards lists more than a 100 stakeable assets.
Staking is possible virtually on any blockchain with Proof-of-Stake consensus. Some of the biggest cryptocurrencies available for staking are algorand, ethereum, tezos, cosmos, dot and cardano.
How Can You Start Staking?
The easiest way for most of you to stake will be going through your current service providers. Most major exchanges offer staking services for the major PoS assets, and the benefit of going through these platforms is that they typically provide you with immediate liquidity for your assets by managing the validator themselves. However, the Securities and Exchange Commission recently sued Kraken to shut down its staking service using the argument that it was tantamount to an investment contract between the exchange and its customers. It is possible that similar offerings from peer exchanges may face similar scrutiny.
If you keep your assets in a self-hosted wallet, meaning away from an exchange, there are other services such as Staked that can get you started. Liquid staking providers such as Lido offer a way for users to earn rewards while maintaining portfolio liquidity. Of course, you also have the opportunity to run your own validator node, but that typically requires a degree of technical sophistication that most novice traders do not have.
Fine Print
Study each platform carefully to make sure you stake the asset that best fits your risk profile. Any crypto investment is speculative, and some stackable tokens can be even more volatile than established assets such as bitcoin. Put simply, in some of these cryptos you risk losing all of your investment. Don’t let your search for yield to cloud your long-term thinking about the value of a base asset.
