STAKING

picture about staking

 

 

Staking Explained

 

The ascent of the Decentralized Finance market has brought forward onto the revenue stream generation arena a concept that had originally been designed for running consensus algorithms. With the sharp increase in demand for passive income generation and liquidity attraction services, staking has evolved from an incentive mechanism into a full-fledged financial instrument.

 

Proof-Of-Stake

 

To fully understand what staking is, it is necessary to first examine the concept that led to its development as a mechanism. The original application for staking was within the Proof-Of-Stake consensus algorithm, which emerged as a more energy efficient and effective blockchain algorithm in opposition to the labor intensive Proof-Of-Work algorithm employed by networks like Bitcoin and Ethereum.

 

Under the PoS algorithm, the number of miners extracting network coins is limited to a set of approved validators who get the chance to process transactions in turn based on the amount of trust they have vested in them on the part of network participants. The trust is represented in the form of stakes, or amounts of network coins that are transferred into the custody of a validator by their respective holders, or delegators. The probability that a validator will have the right to process the next block in the transaction chain is selected randomly, but is also directly proportional to the amount of coins they have as stakes. The delegators, in turn, receive rewards from the validators in the form of commissions from transactions as gratitude for their stakes.

 

PoS has proven to be a highly robust and reliable algorithm that not only encourages network coin holders to participate in the operations of the ecosystem. It also restricts the number of miners needed from an unlimited amount, like in the PoW algorithm’s case, to a limited pool of nodes that will be competing among each other for user stakes.

 

The profitability generated by staking as a form of running PoS has since been translated from its pure validation right delegation function to an instrument of income generation at large employed on exchanges and even dedicated staking platforms.

 

What Is Staking

 

Staking itself appeared in 2012 with the development of Peercoin, but has since become popular enough to become the basis for the upcoming Ethereum 2.0 update, which foresees the transition of the largest blockchain network from PoW to PoS.

 

At its core, staking in the process of locking a certain amount of coins on a wallet or on an exchange with a certain node. The node will be receiving the benefit of priority in processing transactions and will be rewarding those who staked their coins with a percentage of the commission. There are also dedicated staking services that allow users to transfer their coins into custody in exchange for higher rewards with no connection to any form of network validation.

 

Types of Staking

 

Generally speaking, there are two types of staking available to holders of coins, both of which produce varying degrees of profitability. However, there are variations of staking processes that can be considered profitable as well, and offer higher degrees of security or additional benefits.

 

Decentralized staking is the first type, which involves direct lockup of user funds on a blockchain. This is the pure representation of a PoS network’s functioning described above. Users retain full control of their funds and can withdraw their stakes from the validator at any time. Networks using decentralized staking include such prominent names as Tezos, Cosmos, EOS, and others. Decentralized staking also includes the relatively novel Delegated Proof-Of-Stake concept, wherein users can delegate their stakes as voting rights and partake in network operations for rewards. DPoS is the basis of the Binance network.

 

Centralized staking, also known as lending, is the second type of staking that does not necessarily involve the delegation of trust to a validator. Most centralized staking takes place via services that offer users the chance to lock up their coins on a custodial wallet for a predetermined reward. The lent cryptocurrencies can be of any type that the service permits or requires and the timeframes for such staking services can also be predetermined. This type of staking provides considerably higher yields and is the basis of operation for such services as Nexo, BlockFi and many other staking platforms that have emerged from the development of the DeFi market.

 

Liquidity mining, also known as yield mining, is another type of staking that has emerged with the DeFi market. Though not entirely staking by concept, liquidity mining involves users providing liquidity in the form of their crypto holdings to decentralized exchanges and services known as liquidity pools in exchange for rewards. The pools and exchanges offer pairs of coins that users can provide. The provided assets will then be used by the pools and exchanges for running their operations. Since exchanges need to be liquid, most offer generous rewards for this type of variation of staking. Users also retain the right to migrate their liquidity to more profitable pools at any time, making liquidity mining a highly attractive form of passive income generation for crypto holders.

 

Cold staking is another, relatively new type of staking, which does not involve block generation, nor does it have any relation to PoS. Under the given type of staking, users simply lock their assets on a cold wallet disconnected from the internet for a certain period of time and then receive rewards. The given type of staking was introduced by the Callisto network as an eco-friendly alternative to PoS with a higher degree of security for all users involved in the process.

 

Coins For Staking

 

The list of coins that can be staked is extensive and includes virtually any native coin of any PoS network. Among the most popular coins for staking are Tezos, Lisk, NEO, Cosmos, VeChain, Cardano, Near, Stratis, Ankr, and dozens of others that constantly vie for capitalization and liquidity.

 

As for liquidity mining and pools, absolutely any coin or token on the market can be provided as a form of liquidity. Most services offering liquidity mining even offer their own tokens up for pairing, often with higher profitability ratios in the double digits. This makes liquidity mining a highly attractive form of revenue generation, which, however, bears its own risks, as many services lack security, or do not have the necessary capitalization or turnover to produce the amount of rewards they claim to be providing.

 

Conclusion

 

Staking is a form of trust vesting in the form of crypto holdings in exchange for rewards from network validators. The profitability of staking differs from network to network, but stands on average at around 14.95% if the more than 18,000 staking providers are to be considered together. The many variations of staking give users vast opportunities for utilizing their crypto holdings and receiving income.

Published: 2021-07-22