While Bitcoin championed a work-based consensus mechanism, staking crypto projects or those using a ‘proof of stake’ mechanism have risen to ultimate popularity.
Written by Mike Sadler
Table of Contents
- Why Staking Crypto Developed
- PoS: A Crypto Staking Overview
- Cons of Staking Crypto
- Pros of Staking Crypto
- Ready to Stake Crypto?
- Staking Crypto: Where to do it?
- Our Conclusion on Crypto Staking
What do people have against ‘Proof-of-Work (PoW)’, anyways?
The Proof of Work (PoW) consensus mechanism was the first of its kind in the crypto space.
In fact, to this day, it’s still used for the Bitcoin network. In recent years though,, many in the cryptocurrency industry argue that the PoW model is too slow and flawed for this nascent industry.
From energy usage and its environmental impact, to its potential to be exploited by malicious actors, PoW has been taking some hits on the popularity charts lately (although, the validity of these concerns is highly debated.. but that’s not why we’re here today).
In search of a more “feasible” alternative, many crypto projects have turned to Proof of Stake (PoS) as their preferred alternative for a more scalable, more secure consensus mechanism.
With this came the rise of “crypto staking”– a popular way for people to passively see some gains on their crypto.
If the biggest crypto project by market cap, Bitcoin, uses PoW, then why are so many projects trying to move away from it?
Fair question. Let’s touch on this before we get into PoS and staking crypto asset protocols.
To understand why some don’t like PoW, look at it like this:
Let’s say you have a group of drivers in their decked-out, “Fast and Furious”-style cars getting ready to race. All of them with the same goal of crossing the finish line first, of course. However, some drivers have wealthy sponsors, donors & sugar daddies who come from a rich family, so they can afford high-end car parts, can train on the best tracks, and hire the best mentors.
All the drivers will get to the finish line eventually, but only one can finish first. While it’s possible for the drivers with fewer resources to win…in general, it’s highly unlikely.
In this example, each driver is a miner in the PoW network, and the finish line is successfully mining the block to reap the reward. The more resources/money that you have to invest into your PoW crypto mining rig (driver and equipment), the more likely you are to mine the block first (win the race).
With PoW blockchains like bitcoin, large mining companies have come to dominate the mining game over time, so for the DIY miners, who don’t have access to those high-end resources/tools, successful mining becomes less possible (long gone are the simple days of CPU/GPU mining from your home laptop).
Many feel that the energy usage from all of these mining rigs (that have a low chance of successfully mining anyway) is unsustainable and environmentally damaging.
For true decentralization, the more distributed mining there is, the better!
So, many justifiably fear that with PoW, large mining companies have the potential to band together and take over 51% of the network, thus making it open to fraudulent activity like a DDoS attack.
So, what’s Proof-of-Stake (PoS) & Crypto Staking?
In the crypto staking world, PoS or ‘proof-of-stake’ is a blockchain consensus mechanism that was designed to be more energy efficient and less risky than the more dominant PoW method.
The approach is simple: users lock up their cryptocurrency tokens as collateral, or “stake” them, and become a validator of that blockchain network. Any one validator is randomly chosen at a time to validate each block, after factoring in metrics like amount of crypto staked and length of the staking term, and their validation is verified by the other validators on that blockchain.
If you are chosen to validate a block, you are either rewarded for good validations with a “staking reward”, where new coins are minted and the validator receives some portion of the transaction fees from that specific transaction, or you are punished for fraudulent validations by losing your staked collateral.
Looking back at the car racing analogy: with PoS, all the drivers would line up at the starting line and a single driver would be selected to drive across the finish line. This way, fewer resources would have to be used overall, and the process for deciding who mines each block would be programmatically more fair/evenly distributed.
How are proof of stake validators chosen?
The staking history of crypto staking validators is a major factor that contributes to the block validation selection process.
A common first criticism of projects using staking crypto mechanisms is that there could be some bias towards validators that are staking the most coins. They do have the most to lose if they manually interfere with the block validation process, after all.
To combat this bias, many consensus mechanisms will also factor in how long a validator has been staking those coins, If a validator has been staking for a while and hasn’t produced any fraudulent blocks, for example, then they’re more likely to be seen as a reliable validator than the contrapositive.
By considering the amount of staked collateral, the length of any validator’s staking term and a randomized selection process, PoS was built with the intention of true and fair decentralization.
Crypto Staking: the Cons
While staking your crypto assets does have its obvious pros, there are a few cons to consider:
The “Locking Period”
When you go to stake your coin, sometimes it can be moved into what is called a “locked state,” and during this time, you won’t be able to move your coins at all.
Sometimes, you’ll have to lock them up for a certain amount of time (can be anywhere from a month, up to a year, or even longer for some protocols). Sometimes, there may even be an “unstaking period” where you have to wait a certain amount of time after beginning the process before your coins are completely unstaked.
Needless to say, this can leave you highly vulnerable to price volatility because you can’t sell if your staked coins tank in value and are locked in a staking protocol.
Technical Expertise
If you plan on creating your own crypto staking node as a direct validator, it may not be as easy as just pushing a few buttons.
Usually, you’ll need some coding knowledge, a solid computer setup with large RAM, and a wallet that is set up to accept the rewards.
If there are any issues with your node, it’s completely on you to fix them.
3rd Party Risk
If you don’t want to go through setting up your own crypto staking validation node, then you can use a 3rd party platform to stake on your behalf.
However, this isn’t a free ride–that third party will want their cut.
Platforms usually require a “validator commission” for the use of their resources.
Also, once you give them your coins, you’re at the whim of that platform, so if they get hacked, go down, or just run off with your coins, you’re SOL (and we don’t mean Solana).
Rewards Duration
Depending on the crypto staking protocol you choose, it could take anywhere from minutes to weeks before you see the payout of your staking position.
Some people just don’t have this kind of patience.
🤷🏾♂️
Punishment for Uncontrollable Circumstances
Did you know can be punished for things out of your control? I know…yikes.
If for some reason, you lose, power/connection on your validation computer and you don’t maintain 100% uptime while processing transactions, you can be penalized. There is even a very small possibility of you being penalized if you correctly validate a block, but the network says that your validation was incorrect.
Crypto Staking: the Pros
Obviously, lots and lots of folks choose to stake their cryptocurrencies. Here are a few pros of staking crypto on PoS blockchains!
Passive Income
Your crypto works for you! Not the other way around.
Once you have the crypto to stake and the device to run it, you can set it and forget it and earn some delicious yields.
These definitely beat your typical bank’s saving account rates.
Low Barrier To Entry
Although staking on your own can prove to be expensive sometimes, there are many low-cost options available for people at the entry level. You can start staking your coins on certain platforms with just $1!
Low Energy Consumption
Staking does not consume nearly as much energy as mining, so many people feel that PoS is more environmentally friendly than PoW.
Hey, I guess we need our lungs. I guess…ugh.
So you’re ready to get starting with crypto staking, anon?
So you’ve heard enough and are ready to get started. But how?
Lucky for you, there has never been a better time to get started. With all of the options available for you now, your most difficult decisions will be which coins you want to start staking with, and where you want to stake them.
As far as which PoS cryptocurrencies you can stake, all that use that consensus mechanism are eligible!
Here are a few of the most popular staking cryptocurrencies for passive income:
Ethereum ($ETH)
While this blockchain still technically uses PoW, the proposed ETH 2.0 (coming soon?!) will move the blockchain over to PoS. In fact, many early validators are already allowing validators to get started with the ETH 2.0 staking.
To get started, just head over to the ETH 2.0 Launch Pad on their website; you need to own at least 32 ETH, and have an ETH 1.0 mainnet client. Otherwise, you could use a 3rd party service that offers easy entry. It’s possible to get an APY of up to 15%, but realistically you’ll be looking at around 4-7%.
Tezos ($XTZ)
To get started on Tezos as a staker (or “baker” as they’re called on this network), you’ll need to own at least 8,000 $XTZ coins and run a full node.
Through 3rd party services though, you can get by with small amounts of XTZ and just share your baking rewards. You can expect to earn around 5.5% APY staking your Tezos with Kraken, for example.
Algorand ($ALGO)
Staking crypto with the Algorand blockchain requires you to run a full node. You can expect around 4-10% APY.
Even some stablecoins allow for you to stake for rewards!
Ok, great. But WHERE can I stake my crypto?
As far as where to go for crypto staking, if you don’t want to be a direct validator for the network, there are almost too many options for you to choose from. So after deciding which coins you want to stake, it’s best to do your own research on any project’s tokenomics, and then choose the best option that fits you.
Some of the options available:
Centralized Exchanges
Naturally, these popular on/off-ramps didn’t waste time getting into the staking game.
Platforms like Binance, Gemini and Coinbase have competitive rates on different coins, so you may have to do a bit of digging here. Just keep in mind that they WILL be getting their cut.
Staking-As-A-Service Platforms
These are platforms dedicated exclusively to staking crypto and offer subscriptions for their users. Platforms like Stake Capital and MyCointainer offer staking services for many different projects–all for a competitive fee.
Cold/Private Wallet Staking
As the name suggests, you keep your crypto in your own cold/private wallet that has staking functionality, and you manage your staked crypto from there.
Ledger, Trezor, Trust Wallet and CoolWallet S are a few of your options for this kind of staking.
DeFi Staking
Many DeFi protocols allow you to stake crypto as well to support their networks and receive a reward for your continued support.
Maker ($MKR), Synthetix ($SNX), Yearn Finance ($YFI) and Compound ($COMP) are a few of the popular names in this arena.
Our conclusion on staking your crypto
As we’ve established today, PoS is rising to be a legitimate competitor to PoW, and staking gives network participants a new way to earn rewards on their crypto holdings. The “PoW vs PoS” debate divides the crypto community to this day, with many PoS advocates swearing that staking is all around better than the PoW-based mining that we’ve become accustomed to.
As this community rallies and gains more momentum over time, more and more projects are adopting this consensus mechanism, pushing the narrative even further. The biggest proponent of this push being the ETH 2.0 upgrade that has been a long-standing topic of discussion in the space.
Another huge proponent of the PoS push, the DeFi boom of 2020 and 2021, pushed a new wave of staking and yield farming.
From the looks of things, the PoS push is not going anywhere any time soon, so we can expect to see more developments come from this in the near future – ESPECIALLY when ETH 2.0 is fully unleashed in the next year or so, and many of these newer PoS-based projects develop and mature.
Want to learn even more about how staking crypto encourages decentralization? Join our Cryptocurrency Masterclass today!
