You might have heard of Proof-of-Stake (PoS) mining and staking rewards but recent research shows that the majority of people are not very clear about what it does and how it works.
I will keep this as simple as possible, without going into the techincal aspect of it too much but will focus instead on how you can generate profits from staking.
POS is an eco-friendly method of mining that was designed in response to the growing concerns about the excessive energy consumption of the POW mining. Herein lies the key difference between the PoW (Proof of Work) and PoS mechanisms. Unlike POW- where the economic price of participation is electricity, computer power and capital, with the PoS, the cost is the “stake” – amount vested in the project/currency.
Proof of Stake makes use of the tokens/coins staked, to determine who gets to add and verify blocks (the process of mining). In simple terms, the miners here are called “Validators” and they propose a new block to be added to the chain and validate new transactions through a voting process. In order to be a validator, you have to lock-up a certain portion of coins/tokens of that cryptocurrency. This is what we call “staking”.
Staking in this sense can be compared in a way buying stocks or bonds of some form, that will then be paying you dividends. Maybe not the best example, but a close one, except, it has added benefits.
Token holders who “stake” a certain amount of their cryptocurrency also can have the right to vote and to participate in the governance of the network and since they stake their tokens without using them, they are rewarded. This is how staking can become rather profitable. The whole process is controlled via dApps, so there’s little room for error or risk involved.
Staking is evolving with time and today it has become much easier for us to engage in it. At first, users were required to stake their digital assets via specific software which in most cases involved downloading and running a full node and your stake was usually requiring a lock-in period (during which you couldn’t take your coins).
This is the fixed staking, where you are fully and actively involved in the process as you’re running a full node and supporting the network, but today we have third parties involved that create pools and use a combined staking methods to enable anyone who wants to stake and pretty much any amount they want to stake, with as little effort necessary.
This is the so-called soft staking which many wallets and some exchanges offer since 2018. It means that you simply deposit your digital assets into your wallet and allocate them to a staking validator (could be the exchange itself or a third party) and you receive your dividends accordingly. This is called Delegating and it doesn’t stop you from withdrawing your stake at any given moment. Delegating also does not give away your ownership of these coins/tokens at any point. In most cases you would be paying a small fee to the Validator service provider which is understandable give the ease-of-use they offer in return.
Some of the most popular staking digital assets are Tezos, EOS, Tron, Cosmos, Synthexis, Algorand, Band, BNB and many more, which I will review in detail in my next post, so watch out for this.
Right now, the easiest ways to stake digital assets are exchanges which offer soft-staking, like Binance and Kucoin, Poloniex and Bitfinex, or wallets such as Metamask, Trust Wallet, Ledger, Trezor, Cobo Vault, Exodus and Atomic Wallet.
The Ledger hardware wallet is one of the most popular ones in the community when it comes to digital asset storage. It provides two options for staking – using the Ledger Live or external wallet apps.
Staking is not the only way to earn passive income from your crypto holdings. If you are looking for more ways to grow your crypto capital, here are some options:
- Lending and Borrowing – this is the most recent trend in cryptocurrencies that is gaining momentum with Ethereum-based DE-FI projects (decentralized finance).
- Trading – a risky option, but could be quite rewarding when done right. You can check out my review on Token Metrics which is a hell of a tool when it comes to helping you with what coins to trade and finding the right time to enter or exit a trade.
- Mining – there still some altcoins worth mining, albeit it’s not my personal preference as it involves investment that sees a return over a long period of time and in most cases, you will see a bigger return from trading or simply hodling in the same period.
- HOLDing – Purchasing and holding a cryptocurrency in any crypto wallet while hoping it will appreciate in price with time. This will not grow your crypto, but it will most likely grow your fiat value, so for those who are still hanging on to the conventional currencies, it can be a profitable alternative.
Staking of course, is about growing your crypto holdings, so in my next post, I will review the top 10 staking coins, make sure you’re following this blog (go to the top of the right menu on this page.)
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