Staking through the Proof of Stake(PoS) consensus algorithm has proven to be a viable method of earning an income in the crypto space. Despite being a new concept emerging after the Proof of Work mechanism(PoW), PoS introduces a less labor-intensive way users can make huge profits.
The process involves making a certain amount of deposit on a staking wallet to qualify as a block validator. Contributing a more considerable amount of stakes ultimately lands you the highest chance of validating transactions on the PoS based digital asset.
Essentially, it can also portray governance rights in that you become part of a community that makes implementations on behalf of the PoS ecosystem. In return, you garner staking rewards for rendering your services to the blockchain. The rewards are majorly the transaction fees used by the transacting parties.
Later on, PoS extensions such as the Delegated Proof of Stake finally came into the limelight to solve the scalability issues PoW ecosystems experienced. Under the DPoS system, users must select a node operator who will oversee the network’s governance.
After a while, another PoS solution known as the Leased Proof of Stake arrived, whereby users can lease their stake to other nodes. Interestingly, under the LPoS system, both the node and leaser earn a portion of the rewards once the platform’s PoS services are fulfilled.
Basically, any platform employing a staking algorithm looks forward to creating an interactive, transparent, and profitable way of utilizing your money. It also ensures users make the most out of their participation in the staking venture.
More PoS Functions
Bonded Proof of Stake
The Bonded Proof of Stake is yet another approach under the PoS mechanisms. On the BPoS network, a user’s stake amount determines the number of blocks he/she can cover.
Like most PoS approaches, BPoS typically starts when several users decide to lock up their stakes for a specific period. Therefore, your voting influence on the ecosystem depends on the amount of stake the users set aside. In simple terms, the stake contributions also represent the user’s chances of validating a block.
Trustless Proof of Stake
TPoS earning mechanism takes a different road in that users can stake from their cold wallets. Offline storage methods always aim at safeguarding a user’s assets from threats such as hacks.
Hence, the stake amount needs to be on the cold wallets all the time, particularly hardware storage devices such as Ledger Nano S. Stakenet’s XSN protocol is an excellent example of a TPoS based platform. At XSN, a contract is formulated to appoint a merchant node to take your place in the network’s governance and security maintenance task.
TPoS entails crucial information, including the merchant node’s address, a portion of payment, and the XSN staking amount. One advantage that cold staking holds is that the funds are entirely in the user’s hands and not the employed merchant.
All block rewards go to the user’s address exclusive of the merchant’s commission rate. An important point to remember is that the merchant node method is optional since users can opt to run the merchant node independently.
The Downsides?
Price Volatility
Irrefutably, the value of cryptocurrencies usually fluctuates, making them highly unpredictable. The prices of a digital asset could rise or drastically drop within a short time. This price momentum could have an impact on the digital assets staked, especially for short-term lock-up periods.
Users end up redeeming cryptocurrencies with a lower price than what he/she expected. Furthermore, most virtual currencies require users to complete their lock periods, a significant disadvantage for assets going through a price drop.
Sustainability Level of Platform
Anything can happen to the staking protocol a user leverages to carry out the PoS mechanism. To some extent, the digital coin may fail to grow beyond its current state. Thus, the platform may undergo delisting incidents, which leads to losses for users staking through these wallets or exchanges.
Hence, it is essential to consider some aspects such as the coin’s technology, reputation, and the kind of support it receives. In as much as the rewards are also a huge consideration, finding out more about the protocol or digital asset you intend to stake is equally essential.
Examples of Staking Protocols
Polkadot
Polkadot(DOT) is a PoS-based digital asset with the highest staking value of approximately $12,557,911,793. The platform is commonly referred to as the ethereum competitor that seeks to design a decentralized architecture that gives control back to its users.
Unlike most platforms where every user is a staker, Polkadot divides its stakers into nominators and validators. According to the two groups, nominators are in charge of appointing validators who handle the transaction blocks.
To qualify as a nominator in the Nominated Proof of Stake, users need to own a significant DOT amount. By holding the DOT amount, nominators can suggest preferable candidates who can run as validators on the Polkadot ecosystem. The rewards are split between the validators and the number of nominators he/she has.
Cardano
Cardano(ADA) comes in as the second digital asset with the highest staked value. At Cardano, stakers can rely on operating their pools or get onboard existing pools. However, running a pool requires more effort and access to resources such as an internet connection, server maintenance skills, and other technical skills.
Utilizing pool staking reduces the need for any internet connection and regular monitoring. To ensure the pools run in a decentralized manner, Cardano ensures that the staking pools accumulate lower rewards even as the pools continue expanding. This move will incentivize users to move and stake on other pools in the network.
On top of that, it will also guarantee that the dominance level remains the same across all pools. There is no minimum amount necessary to stake, and the rewards are distributed automatically once users stake their ADA coins.
Avalanche
Under the Avalanche(AVAX) platform, users can choose to stake as validators or delegate the validating rights to another party. However, delegating is the most effective way to stake with the platform as it contains lesser risks and complexities. Delegators keep a portion of the validator’s rewards since part of the rewards is the delegation fees.
A staking calculator is also available to determine the exact amount of rewards accumulated. As a delegator, you need to stake a minimum of 25 AVAX, which can take a minimum staking period of two weeks. Delegators need to specify further the node you are delegating to, and the address to which appointed validators receive their rewards.
Ethereum 2.0
Ethereum(ETH) recently progressed to another version, which seeks to bring together a larger community. For ETH2 staking, users have to make an amount of 32ETH to become a validator and participate in completing transactional operations. The Beacon Chain is responsible for managing the entire PoS ecosystem on ethereum.
To earn on the Beacon Chain ecosystem, users have to perform their block validation duties honestly or by monitoring the undertakings of other validators on the network. Dishonest validators who may go offline or fail to verify the transaction may lose their initial ETH stake.
Algorand
Algorand poses a decentralized digital currency with a total staked value of $3,057,852,392 at the time of writing. Algorand realizes that not everyone can participate as a node because of the technical details surrounding it. Therefore, the platform provides an offline staking model that allows users to stake their ALGO, ultimately reducing their need to act as an active node. Rewards are based on the number of stakes a user possesses and the number of blocks minted. Furthermore, the rewards are distributed in ALGOs and arrive in the validator’s wallet at intervals of 20 minutes.
Bottomline
Leveraging PoS digital assets to stake funds is becoming a popular earning model as more enthusiasts join the validator’s community. Today, Cardano and ETH are on the run to become the most effective staking platforms in the crypto space.
However, Polkadot remains the number one ecosystem to stake on with its outstanding NPoS consensus algorithm. As time goes by, there’s no telling who will be on the leader’s board, primarily due to the rapid technological changes and the underlying infrastructure.
