Crypto staking is a process to hold your crypto coins in a wallet to support operations of a blockchain network, and in return, you earn rewards.
Compared to cryptocurrency mining, staking is much more efficient and enables the larger participation of people. Thus resulting in greater decentralization of the blockchain network.
Staking is one of the best ways to generate passive income on your crypto holdings. So, if you are a long term investor in cryptos, you must not ignore the concept and benefits of staking. Read this article till the end to know how it is done and the current opportunities.
What is Crypto Staking?
Ethereum staking has revived the investor’s interest in staking in the market. If you are a long term investor in the crypto market, crypto staking is for you. You can enjoy the benefit of both capital appreciation and guaranteed rewards in return for your staked coins.
The concept of staking was introduced in 2012 as an alternative to the proof-of-work (PoW) system, which is doomed from the very beginning as an energy-intensive process. Also, the PoW system carries the risk the centralization.
Compared to mining cryptocurrencies, staking is simple and can be done by anyone. In staking, you have to lock your cryptocurrencies in a particular wallet to support the network operations like validating transactions, forging blocks, and securing the network. And, in return, you will receive block rewards in the form of newly minted coins.
What is proof of stake (PoS)?
The proof of stake is a consensus mechanism to achieve distributed consensus in the blockchain network. It governs the rules of staking and how validators will be selected to create and confirm the blocks in the blockchain.
Validators are the node operator responsible for supporting the network operation.
Here, the role of the validator in the blockchain depends on the number of coins bet in the blockchain. To become a validator, you need to stake the minimum number of coins required by the blockchain. The higher the number of coins staked, the greater the chances of getting selected to create the next block.
Some of the benefits of the PoS system are:
- It discourages centralization
- Lower barrier to entry and eliminate the need for specialised hardware requirements.
- Better energy efficiency than PoW system
How Does Staking Crypto Work?
Unlike mining, which requires enormous computing power to create new cryptocurrencies and secure the blockchain network, you need to lock in your crypto coins in a designated crypto wallet in crypto staking.
The PoS protocol randomly selects the validators to forge the next coin. The higher the number of coins staked, the greater the chance of yours forging the next block. Once the new block is generated or added to the blockchain, the validators receive the block reward.
The coins held by the blockchain network acts as a security against validating fraudulent transactions. Therefore, if a validator adds fraudulent transactions to the block, the network confiscates the staked coins. And, by design in the PoS protocols, the staking reward is always lower than the amount staked, which deter validators from doing something wrong.
If a validator decides to withdraw the staked coins, they will be released after a certain period to ensure all the forged blocks are true.
How to Stake Crypto?
There are two ways to stake cryptos, first, by becoming a validator of a blockchain network and second, through a staking pool.
To become a validator, you should bring in the minimum number of coins required for the role. For instance, to become a full validator on the ETH mainnet, you must stake at least 32 ETH.
For small retail investors, staking pools are the best option to stake cryptocurrencies and earn passive income. Many large crypto exchanges provide staking pool services. The staking rules differ in each exchange but are less stringent and allow you to start staking with a lesser number of cryptos.
Compared to becoming a full validator, staking pools offer you flexibility and let you earn a fixed sum of reward over time, similar to an interest-bearing deposit in the bank. You don’t have to worry about validating transactions and forging blocks here, as the staking pool does all the hard work.
However, the staking pool will deduct some of your rewards as charges before crediting the rewards.
Some of the popular proof-of-stake coins are Cardano, Solana, Argoland, Tezos, Celo, etc.
Ethereum is also moving away entirely from proof-of-work to proof-of-stake consensus mechanism by the end of this year or early next year.
Difference Between Ethereum Mining and Ethereum Staking?
Compared to mining bitcoins, which are ASIC dependent, mining Ethereum requires no specialised computer hardware. They can be mined using GPU, which are readily available in the market.
The current block reward from mining Ethereum is 2 ETH. However, you should note that the network adjusts the block rewards depending on the network congestion. This makes it difficult for miners to calculate the future return on their investments.
Whereas in staking, there is no upfront investment on any hardware devices. You only need to buy ETH to stake them. The Ethereum staking rewards are in the range of 5-7% APR.
Why is Ethereum moving away from mining to staking?
The primary objective for Ethereum to shift to a PoS system is to improve the scalability of the blockchain network and reduce energy consumption.
Currently, with the proof-of-work system, Ethereum faces many challenges in scaling up its blockchain network. Initially, at its launch in 2015, it could process only 13 transactions per second. But, as the popularity and adoption of the Ethereum ecosystem witnessed tremendous growth, the low scalability of the blockchain network became a significant bottleneck.
It resulted in slower transaction processing and increased transaction fees, causing developers to shift to other blockchains.
The shift to a proof-of-stake consensus mechanism will enable Ethereum to improve on scalability significantly. Ethereum 2.0 will use a sharding method that will allow it to create multiple blocks simultaneously, thus improving transaction throughput. Post transition to the PoS system, Ethereum 2.0 will scale up to 100,000 TPS or more. It will significantly reduce transaction processing time and fees.
With the transition to the PoS system, Ethereum 2.0 will consume 99.95% less energy to maintain the network compared to the current PoW system.
To give you a perspective, as per the Ethereum Foundation Blog, under the PoW system, Ethereum consumes around 44.49 TWh per year or 5.13 GW continuously. And, it is expected to come down to 2.62 MW with the PoS system.
This will help Ethereum to shed the tag of the most energy-intensive cryptocurrency after Bitcoin.
As the cryptosphere expands, staking will become one of the most significant elements of blockchain systems. Staking offers value to all stakeholders in the crypto ecosystem. It is the next big thing in making in the cryptosphere.
Staking allows you to create value in the short term through passive rewards, while HODLing generates more significant rewards through capital appreciation.
FAQs on Crypto Staking
Why is Ethereum moving to proof of stake?
Ethereum is moving to a proof of stake consensus mechanism to improve scalability and make the blockchain more versatile to absorb the future growth potential. Moving to a PoS system will also reduce the energy consumption level by 99.95% compared to mining Ethereum.
Is ETH staking worth it?
ETH staking is profitable because it involves no upfront cost on hardware and expenses towards electricity consumption. The staking returns are in the range of 5-7% APR.
Is staking profitable?
Yes, staking is as profitable as mining cryptocurrencies. Unlike mining, staking doesn’t require a considerable upfront investment, apart from buying the coins to stake them. Also, the value of coins staked will increase over the long term.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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