- By Pierre-Alexandre
April 13th, 2019
Cryptocurrency staking has become an alternative way for crypto investors to make money from the market. Staking of cryptocurrencies is usually possible by digital currencies using the proof of stake (PoS) and the delegated proof of stake (DPoS) consensus mechanisms.
What is staking in cryptocurrencies?
Cryptocurrency staking is the act of hodling crypto in your wallet for a specific period, then earning interest as a result of that. Users receive rewards by hodling the cryptocurrencies, and the earnings differ depending on the length of time an investor hodl the cryptocurrency in their wallet. The longer the staking duration, the higher return an investor gets.
Staking is used as a way of validating transactions on a blockchain, similar to what mining represents in the proof of work (PoW) protocol. In a PoS blockchain, the higher the coins a user holds in his/her account, the higher the chances that they would take part in a transaction validation process.
The next validator in a PoS system is usually chosen in a random process which is heavily influenced by the number of coins a user is holding at that particular time or in some cases, the length of time the user has been keeping the cryptocurrency.
How does crypto staking work?
Crypto staking works in a similar fashion to traditional fixed deposit investment accounts, the longer your staking time, the higher the reward you would earn at the end of the tenure. Staking coins differ from one cryptocurrency to another, but the underlying principle behind then remains the same. If you want to stake coins on most PoS and DPoS networks, you would be required to operate a node or masternode, or you can join one of them.
The staking mechanism also has a delegation feature that allows users to delegate other people to carry out votes on their behalf. Users can earn coins if they entrust their vote to a trusted party, and is one favorite way that investors make money via the staking system. This feature gives delegate extra validation power, who will, in turn, pay its customers coins for their votes.
Benefits of the staking protocol
Staking cryptocurrencies have several advantages to the users, and they include;
- Investors with a large holding of a cryptocurrency would be able to validate transactions on the blockchain. This is unlike the PoW system where the job falls solely to miners.
- Unlike the PoW protocol, the consensus mechanism in this system eliminates the need for high-end computer networks, which usually consumer high energy and cost a lot to maintain. This makes staking an environmentally friendly cryptocurrency consensus method.
- The value of PoS cryptocurrencies does not depend on ASICs and other mining equipment, with their prices only affected by a change in the market conditions.
The probability of a 51% attack is usually lower in PoS cryptocurrencies compared to their PoW counterparts.
The fact that validators do not require expensive computer hardware is one of the most important benefits of the PoS system. Investors in PoS cryptocurrencies usually have a predictable source of income and a guaranteed return on investment, with the market conditions the only vice that affects their earnings.
However, the drawback for cryptocurrency staking is that the coins are held in a wallet for a certain period, during which they cannot be sold. This could present a problem for some people, especially when the cryptocurrencies are experiencing a Bull Run and the prices are rising. The profit earned from staking might not be up to what they would have gained if the coins were sold during a market Bull Run.
Popular cryptocurrencies to stake your funds
This is a popular cryptocurrency that promises user security and fast transaction speed. Users can stake the cryptocurrency by operating the Dash Masternode though there is a minimum number of coins required to carry out the staking.
NEO is also called the Chinese Ethereum, with its staking option being one of the most popular in the cryptocurrency space. It offers investors an average of 5.5% annually when staking the cryptocurrency; making is a good investment when all you do is hold the coin.
This is a cryptocurrency that is dedicated to achieving global adoption. The cryptocurrency staking on PundiX gives users an impressive 22.8% yield per year, making it one of the best currently available in the crypto space.
OkCash is a digital currency designed to carry out micropayments. By staking your cryptocurrency, you would be able to earn as much as 10% annually.
This cryptocurrency offers a modest return on your investment. The Zcash fork gives investors a 5% annual return on their investment if they stake the cryptocurrency.
Other popular ones include VeChain, Navcoin, LISK, ARK, ReddCoin, and more.
Investors turn to staking for profit
Some cryptocurrency investors have turned to staking as their primary source of income from the crypto space. While staking differs from trading that is popular within the crypto space, it offers investors annual interest on their holdings. The reduced risk involved in cryptocurrency staking has made it a good source of passive income for most investors that do not wish to deal with the high volatility of the crypto market.
The staking process allows them to remain active investors in the cryptocurrency space while avoiding the high volatility with other forms of investments such as day trading. The rise of staking has also seen the creation of companies such as EON Staking Inc. and Figment that are dedicated to helping people stake their cryptocurrencies on various blockchains.
The cryptocurrency continues to experience more users, especially in countries suffering from hyperinflation. For some investors, staking is the best way to hodl their assets and make a profit from it in the end.