How Staking Works

Have you ever wondered how cryptocurrencies can maintain their decentralized character consistency without central control? This is only possible through the several consensus mechanisms that support transaction validations and the security of blockchains without third-party interference. One of the prominent mechanisms is the Proof-of-Stake (PoS) that depends on the staking of crypto coins.

Staking is gradually gaining popularity in the cryptocurrency space. Through staking, participants lay aside their crypto holding for a given period to support a blockchain and receive rewards at the end.

Through this article, you will learn how staking works and the possible benefits. Also, you will know how staking increases prices and the best staking crypto coins. Read on.

What is Crypto Staking?

Staking is a process that enables crypto investors to set aside part or all their crypto holdings to support a blockchain and receive rewards in return. The staking process is only possible for protocols that run with the Proof-of-Stake (PoS) consensus mechanism.

A PoS model can confirm and validate transactions using the staked coins. This is because is the staking process removes the coins from circulation and makes them available for the blockchain to use. Through the validation process, new blocks are created and added to the blockchain. Also, new tokens are minted used to reward the investors.

The staking process stands as an easy method for investors to earn passive income. However, besides the income, participants also receive the governance rights and power on the network.

How Does Crypto Staking Works?

Proof-of-Stake networks can validate transactions and maintain the security on the blockchain through staking. This will enable the validators to create new blocks as all the staking participants will be incentivized at the end of a staking period.

The process starts as a customer separates and dedicates his crypto coins to support a network over a certain period. The staked tokens are no longer in circulation within the crypto market for the given time. The blockchain then uses the staked coins for the maintenance of its nodes to execute transactions. This process will facilitate the creation of new blocks that will be added to the blockchain.

The participants in the exercise will receive rewards depending on the crypto they added and the staking yields. Depending on the network, dividends from staking can range from 5% to 20% APY.

Proof-of-Stake and the PoS Variants

Proof-of-Stake is one of the consensus mechanisms for verifying transactions and maintaining the security of blockchains within the cryptocurrency ecosystem. It uses the process of staking, where customers lock up their crypto holdings for a certain period to earn rewards.

Besides the original PoS models, there are other variants of this mechanism.

Proof-of-Stake (PoS)

The traditional Proo-of-Stake consensus mechanism enables users to become direct participants in the protocol’s governance and transaction validations. It doesn’t engage in the delegation process. However, the number of staked coins facilitates a participant’s chance of being a validator. Examples of networks with PoS mechanisms include Ethereum 2.0, Algorand, and others.

Delegated Proof-of-Stake (DPoS)

Through elections, a certain number of staking participants are selected as validators in transaction validations and ensure the network’s security. It’s the delegators that vote, and the number of your staked coins determines the voting power. Also, participants are expected to specify their staking amount to each validator. This means that you can distribute your holding to more than one validator.

Moreover, in cases where a validator gets a slashing, the delegators are not affected. Some of the networks operating with DPoS include Tron, EOS, Steem, and others.

Nominated Proof-of-Stake (NPoS)

With Nominated Proof-of-Stake, the staking participants will choose their trusted validators while the network distributes the staked tokens evenly and automatically among the validators. Polkadot is an example of a network running on NPoS that employs some processes that will ensure fairness and security in the selection of efficient validators within the network. So, it uses some tools like game theory, discrete optimization, election theory, and others. This eliminates validators’ influences and uneven power that could bias nominators’ voting.

Furthermore, if there is a loss of stake through validators’ performances, the nominators are also affected as they are accountable for nominating bad validators.

Liquid Proof-of-Stake (LPoS)

For LPoS, the delegating process is optional. Moreover, the staking participants retain custody of their staked coins as they won’t release them to the validators. The delegators receive voting rights on decisions concerning the protocol and its security that come through validation.

But in cases of security faults on validations such as double baking or endorsement, only the validators are penalized. The delegators remain unaffected. Tezos is an example of a network running on LPoS.

Bonded Proof-of-Stake (BPoS)

The BPoS mechanism operates with an optional delegation, just like LPoS. Also, the delegators retain custody of their stakes tokens and are entitled to voting rights for the protocol’s amendments. But, both the validators and delegators staked coins are affected if there is a slash.

Through its operations, BPoS offers distinctive solutions to staking ratio problems that some validators used to keep to avoid over-delegation. Hence, the delegators are highly diligent in voting for validators. Also, they keep on a strong assessment and verification of their validators’ performances. Examples of networks with BPoS include Cosmos and IRISnet.

Masternodes

These are networks with more functionality than normal operating nodes. Some of the additions include transaction verifications, engagement in governance tasks, anonymizing transactions for coins that are privacy-oriented. Examples of networks with Masternodes include Dash, SysCoins, PIVX, etc.

Hybrid Proof-of-Stake (HPoS)

The HPoS makes a combination of Proof-of-Stake (PoS) and Proof-of-Work (PoW). With the correlation of PoS and PoW, the security of the blockchain is enhanced. In operability, it’s the miners that create new blocks through PoW while the validators will vote on the validity of the blocks through PoS. Some of the networks with the HPoS mechanism include Decred, Hcash, etc.

Staking Vs Mining

One of the unique attributes of cryptocurrencies is that they are decentralized. This means that they have no central control and transactions have no third-party influence, unlike banking. This decentralization is maintained through the consensus mechanism of the blockchain that keeps the network secured.

The original Proof-of-Work (PoW) mechanism uses mining for operation, a process that consumes lots of energy as it solves some cryptographic puzzles. But the Proof-of-Stake (PoS) mechanism depends on the staking process where participants just lock up some crypto coins for some time. This facilitates the validation of transactions and minting of new tokens for the network in a more energy-efficient way.

Here is s comparison between Staking (PoS) and Mining (PoW)

Staking	Mining
The staking process is exclusively applicable to Proof-of-Stake (PoS) blockchains and networks.	The mining process is only applicable to Proof-of-Work (PoW) blockchains and networks.
In staking, participants lock up their crypto holdings to validate transactions.	Miners engage in solving some complicated cryptographic puzzles for transaction validations.
Crypto staking facilitates node validations the addition of new blocks to the blockchain. The stakers will receive minted coins as rewards.	The first miner with the solution of the puzzles adds a new block to the blockchain. Subsequently, he will receive a reward.
There is no requirement for special hardware while staking.	Mining requires special hardware to enhance computational advantage.
Participants with a higher number of staked coins have the chance of becoming validators.	Miners with more computational power have increased capacity for solving mathematical puzzles to receive rewards.
Staking poses no threat of environmental pollution as its energy-efficient. Also, it’s more eco-friendly.	Mining consumes lots of electrical energy and is a big risk to environmental pollution.

Does Staking Increase Price?

Through staking, the price of a crypto coin can rise or fall due to the factors of market demand and supply. When there are more participants in staking, it will remove those staked coins from circulation within the crypto market. This will invariably create a shortage of that crypto coin. If the market demand for the token increases, there will be a price increase.

However, where there is no high market demand for a crypto coin, even as participants lock up the holdings, the outcome will take a different turn. As more coins will be minted and added to stakers holdings, there will be an increase in the supply of the crypto coins after the staking period without a rise in its market demand. Hence, a possible price drop for the crypto token.

Some Requirements for Staking

The requirements for staking may not come rigid for crypto users. In most cases, different networks make their demands which will depend on the participation level of the customer. Despite the variation in requirements among networks, the two primary common staking requirements are; staking capital and technical knowledge.

Staking Capital

The staking capital is the number of crypto coins that a customer will set aside to facilitate transaction validation on a network. In return, he will receive more tokens as rewards. The process of staking demands that there will be validators who are in charge of nodes within the blockchain and will undertake the responsibility of confirming and validating transactions.

In most cases, the greater the number of staked coins, the higher a customer’s chance of being a validator and participation in governance. For some networks like Cardano, there is no demand for any minimum crypto staking coins. Customers can stake any amount to become part of the network’s staking pool and earn rewards. There are still some blockchains with specified minimum staking coins to be a validator.

For instance, becoming a validator on the Ethereum blockchain demands that the customer must stake a minimum of 32 ETH. For Tezos, the minimum staking coins is 8,000 XTZ to be a validator.

Furthermore, a customer’s type of staking setup could impact his staking capital. For example, solo staking takes more staking coins than joining staking pools or using the services of crypto exchanges. Also, using hardware wallets like Ledger wallets for staking takes more capital for setup.

Technical Knowledge

Staking may appear as a very simple process where the user is expected just to hold his crypto coins to participate, but it could have more. The process could become quite complex as participation increases as certain technical knowledge is required to maintain such levels.

Most newbies in the cryptocurrency space lack the basic technical knowledge that could expose them more to risks. This explains the greater use of staking service providers that bear the responsibility of managing the entire staking operations. Hence, these service providers are gaining more popularity recently.

However, having a good knowledge of staking will enable a customer to function properly, even as a validator of a blockchain. Depending on the network, the validator must have interrupted access to the internet that will ensure the 24/7 running of his node.

Here are some responsibilities a validator must have the technical knowledge to handle within a network.

• Transaction validations.
• Governance participation such as voting and other decision makings.
• Maintaining uninterrupted uptime for his validating node within a blockchain.
• Building network standards
• Active Engagement in the forum discussions and network community.

What Are the Benefits of Crypto Staking?

Staking has some benefits that investors could enjoy with their holdings. Here are some of the benefits of staking.

Passive Income

The ability to receive passive income is the most popular reason for several investors that engage in staking. With the lock-up process, participants that get up to 5% to 20% yields are added to their coins. Moreover, your earnings from staking depend on the number of coins staked.

Network Participation

Besides receiving passive income, you can be empowered to participate actively in the governance of the network. The locked-up tokens depict your commitment and support for maintaining the operation and security of the platform. Hence, for most protocols, you will become an active participant with voting rights on the network.

Enhanced Scalability

With staking, most networks have increased capacity for prompt execution of transactions. For instance, networks like Polygon, Cardano, Solana, and others display high scalability and could perform thousands of transactions per second.

Eco-Friendly

Staking has little or no need for energy consumption. The process poses no threat to the environment through pollution. Hence, it’s an eco-friendlier process than the mining process of Proof-of-Work.

No Equipment Requirement

Staking does not need any special equipment that facilitates the process like what is obtainable in mining. The process is consummated once an investor sets aside part or all of his crypto holdings to support a blockchain.

Best Staking Crypto Coins

Staking could be more beneficial when you involve top-performing and profitable crypto coins in the process. It’s very important that you research crypto coins before engaging in the staking process with them.

Here are the five best staking crypto coins for you.

1. StakeMoon – SMOON

StakeMoon is a decentralized network that runs on the Binance Smart Chain (BSC). The protocol strives to incentivize staking and provide limitless liquidity for transaction validations. Hence it offers great support to investors for long-term holdings.

The network uses two approaches for achieving its aims

• It imposes a 15% taxation rate on all daily trading transactions on its SMOON token. This serves as a discouragement for the short-term investment of SMOON and its daily price speculation.
• It rewards its customers that stake their SMOON tokens to encourage long-term holdings.

Furthermore, the network shares its 15% tax derivatives by distributing 10% to its token holders, while 5% goes to its liquidity pool.

2. Polkadot – DOT

Operating with the Nominated Proof-of-Stake (NPoS) mechanism, Polkadot functions as a platform with a cross-chain solution. It enables the interoperability of several blockchains and presents customers with a single platform for interactions.

Though launched in 2020, Polkadot is gradually rising as one of the top blockchains through the performance. The native token, DOT, supports and empowers its operation.

As a viable cryptocurrency for staking, participants can earn up to 13% APY. In addition, the nominators can nominate between 1 to 16 validators which will handle the operations of the nodes and validate transactions for the blockchain. Also, to become a validator, there is a minimum requirement of 350 DOT.

3. Tezos – XTZ

Tezos runs with a Liquid Proof-of-Stake (LPoS) that maintains energy efficiency on the platform that is comparable to that of Bitcoin. Through its optional delegation, the staking process of the native token, XTZ, is very flexible.

Staking XTZ gives investors the opportunity of earning more income and voting rights on the network. Moreover, the blockchain gets the capacity to validate transactions and create new blocks within the network. Also known as baking, staking on Tezos could either be as a delegator or self-baker (validator). Validators require a minimum staking of 8,000 XTZ.

Once you engage in the baking process, your first reward comes after 35 – 40 days. Subsequently, you are entitled to your rewards at intervals of three days. Staking on the platform gives you a yield of about 6.75% – 10% APY.

4. Cosmos – ATOM

Cosmos is a decentralized network that facilitates customization and connection of several other decentralized blockchains for easy access. It makes it possible for customers to enjoy different applications from a single platform without having to login into several platforms. The functionality of Cosmos is with Delegated Proof-of-Stake (DPoS) consensus mechanism.

By staking the network’s native token, you receive rewards of more coins as the yield of your tokens will maintain the security of the blockchain. The reward could be up to 9.7% APY.

5. Solana – SOL

The high scalability of Solana is one of its top distinguishing features. Also, it has the capacity of executing transactions as they come rather than in blocks. The native token, SOL, supports the running of the blockchain.

The staking process allows delegators to select validators that will run the operation of the nodes of the blockchain. Once selected, the validators get increased voting weights.

Furthermore, earning on Solana depends on the number of participants staked coins, the network’s inflation rate, etc. The protocol dedicates part of its inflation earning to incentivizing its stakers.

Conclusion

The staking process, which is only applicable to PoS models, allows investors to earn passive income using their crypto coins. Also, they will receive participatory rights within the network from their locked-up tokens.

But, research a cryptocurrency properly before engaging on its coins to staking. Using any of our listed best five crypto coins to stake will give you the expected returns and yield from staking.