What Is Crypto Staking?
Crypto staking is a revolutionary way to earn passive income. Unlike Bitcoin’s proof-of-work (PoW), staking uses a different consensus mechanism called proof-of-stake (PoS). Stakers lend cryptocurrency and earn interest or yield-farming rewards in return. Staking is also more eco-friendly than resource-heavy mining. But it’s not without risk.
Proof-Of-Work (PoW) Vs. Proof-Of-Stake (PoS)
Bitcoin and other cryptocurrencies use the PoW mechanism. Blocks of transactions are gathered and then linked into blockchains. Complex mathematical puzzles solved by the miners earn the right to add blocks onto the blockchain.
This process repeats with new competitions and additions, enabling a secure and decentralized network. However, PoW involves many arbitrary computations that consist of numerous mining resources.
On the other hand, proof-of-stake (PoS) avoids the computations altogether. Stakers do not have to solve complex hash challenges, which opens up the process to more participants. Instead, they lock in coins to “win” block-validation rights. The greater the stake—the more cryptocoins they lock in—means the proportionally increased chances they have of being chosen.
So participants have an increased risk in gambling for a chance at a reward. They also have the incentive to keep the network secure because they have a coin-holding stake in the process.
Staking does not require specialized mining hardware. However, while stakers don’t have to pay for that hardware, their cost instead is the investment for the stake. The most practical means to maintain their funds is to use a suitable wallet.
Staking Reward Calculation
The means to staking rewards vary from network to network, including calculating by individual blocks or assessing rewards as a set percentage. When networks assess rewards block-by-block, they consider staked coin numbers, the validator’s experience, the total coins, and inflation, so the amount varies. A set rate may instill confidence in the stakeholders due to the predictability and ease in calculating the expected staking reward.
Participants can also combine their resources in a process known as a staking pool. A pool increases their chances by enabling higher stakes. If the pool is successful and they win the opportunity to validate the blocks, they share the rewards according to their contribution amounts.
Staking pools are attractive to new stakers who are learning how to participate. Pools typically have unfixed periods without withdrawal locks. They may also have lower minimum participation amounts than individual staking. Additionally, pools have greater access to networks with financial or technical entry barriers.
However, the process to set up and administer a staking pool is more complicated and time-consuming. Therefore, participants may be required to pay a fee percentage out of their rewards to the entity running the pool.
An alternative means of staking is cold staking, where the wallet is not internet-connected. Instead, it utilizes hardware or air-gapped software wallets. Participants using cold storage must maintain their wallets to avoid missing out on rewards. But it’s beneficial for large stakes because it offers the highest levels of fund protection.
So Which Is Better, PoW or PoS?
PoW has a lower level of risk coupled with a higher level of effort. While PoS has increased risk, it has minimal effort, greater reward chances with pooled funds, and lower entry barriers. The choice between the two really depends on the participant’s needs and the level of risk they are willing to take on.