The Whole New World of Cryptocurrency Staking and All You Need To Know

Cryptocurrency staking: What is it?

In the cryptocurrency world, there are about as many ways of making money as there are currencies. Since crypto aren’t only seen as currencies, but also as investments, several currencies and methods have appeared that allow for people to earn income passively. One of those methods, one that has recently become more common, is staking.

When banking with fiat currency, one of the many options people are offered is a fixed account. These contracts require the person to deposit a certain amount of money in the bank and leave it there, frozen, for a set amount of time.

 Once that time is up, the money goes back to the person along with an interest payment higher than they would have obtained with a savings account.

It's one of the less smart investment methods in fiat currencies, if only because interests are often too low so earnings are relatively small when compared with other, less safe investments.

However, since they are risk-free, people still use them – particularly when dealing with money they want to keep saved or invest but can’t bear to lose.

In cryptocurrencies, staking is pretty much the same: You buy an amount of crypto and can’t spend it, or sell it, for a set amount of time. As a reward for keeping that money parked, you receive more of that crypto. The terms and amounts of money can vary, but the fact is the same: You get crypto for having crypto.

What makes staking attractive

As mentioned before, a fixed deposit is one of the weaker methods of investment for fiat currency. That, luckily, isn’t necessarily so for crypto – although, of course, this depends on the crypto you’re planning to stake.

First of all, not all crypto can be staked. Cryptocurrencies that use proof-of-work methods to generate more currency can’t be staked by definition since the proof-of-work method creates new cryptocurrencies and assigns them to the miners.

Proof-of-stake currencies don’t constantly add extra currency to the blockchain – instead, a set amount of them is created in the beginning. This amount isn’t supposed to change.

The reason why proof-of-stake cryptocurrencies, and staking as a whole, is taking flight among cryptocurrencies is simple: It’s much, much cheaper for cryptocurrencies to work under proof-of-stake than under proof-of-work.

Proof-of-stake Vs. Proof-of-work

In order to understand why proof-of-stake is often considered a better alternative to the proof-of-work algorithm that fuels most major cryptocurrencies, we need to understand how both of them work.
First, the goal of both algorithms is the same: authenticating transactions.

Thus, the number of blocks for either a POS or POW cryptocurrencies depend on the number of transactions going through the network. In both cases, transactions are grouped in “blocks” and assigned to either a miner (for POW) or a welder (POS).

Proof-of-work and energy loss

The way blocks are assigned, however, differ greatly. In POW-type cryptocurrencies, all miners have issued a highly complex mathematical problem – one that, more often than not, can only be solved by brute force.

All miners who receive the problem then start trying to solve it, and the first miner to do so is then assigned the block, along with the reward. Everyone who doesn’t solve it first gets nothing, and all the work done to try and solve the problem is wasted.

Then there’s the environment. Not only does mining proof-of-work currencies imply lost money, but it also means a lot of electricity is wasted – which means POW currencies are hardly green.

In a world where we’re trying to reduce carbon emissions and heat generation, this is seen as unsustainable.

Proof-of-stake, a greener option

Proof-of-stake currencies work differently. Instead of having everyone rush to solve a problem to gain the right to authenticate a block, proof-of-stake blockchains assign the blocks to users based on the amount of crypto they have on the stake.

Those who have more crypto have better chances of being assigned blocks, but in general, anyone can get a block.

This does away with the massive power losses, while still having the blockchain users themselves authenticate transactions. Since proof-of-stake currencies don’t generate new coins, the person or persons who authenticate transactions are instead given the transaction fees.

Now, security is always an issue. Proof-of-work currencies get over this by making the amount of money one would need to spend to be able to make corrupted data pass always be way larger than the payoff. For proof-of-stake, where massive amounts of work and investment aren’t necessary, that’s a problem.

The stake part of proof-of-stake is the answer. When a user deposits their crypto in a proof-of-stake wallet, they aren’t just raising their chances of being assigned a block – they are, also, leaving that ‘stake’ money as collateral.

If any node in a proof-of-stake system is found to be consistently sending wrong data, either with the aim of crashing the system or to meddle with the integrity of the blockchain, their stake is taken away.

Is staking a good way to make money?

Yes and no. Staking earns, on average, 5.5% of your staked amount a year. That’s low. Not as low as having that money in the bank, but way lower than most investments. Then again, it’s not too risky.

Ideally, you’d want to stake on cryptocurrencies whose value is appreciating. The way the crypto world works, it’s common for people to hold onto their crypto assets if they’re gaining value. Staking is a way of earning interests in an investment that’s already increasing in value – thus double-dipping on your earnings.

Last Lines

All said, staking isn’t risk-free. While the amount of crypto you get from it is deterministic, the value of said crypto versus other crypto or fiat currency can go down.

Since you can’t move your staked money until after the end of the term, that means you might effectively end up losing money – potentially lots of it.

Thus, staking can be a good way to make money, but only if you stake on crypto that is gaining value and learn to read the market so you know when to stop staking and jump out.

Alternatively, if you’re planning to have that crypto anyway, then staking on a stable cryptocurrency might work. Else, there are better ways of investing out there.