Staking is a form of coin investment in the crypto market. In this article, let’s dive deeper into what is the benefit of staking crypto and how to earn passive income, and support the security and stability of the network effectively.
What is Staking in Crypto?
Staking is the holding of a certain amount of cryptocurrency in the electronic wallet of a Blockchain project for a certain period of time to receive rewards. The reward that investors receive depends on the amount of coins staked and the duration of the stake.
Proof of Stake is the consensus algorithm in Blockchain. In it, participants will stake their coins (staking coins) into the Blockchain network to validate transactions and generate new blocks. Rewards (including block rewards and transaction fees) will be given to PoS participants as an incentive for their contributions.
How does Staking work?
PoW blockchains mine to add new blocks to the blockchain, whereas PoS blockchains create and validate new blocks through staking. The staking process relies on validators that lock coins that can be randomly selected for a specific period of time to generate blocks. Usually, participants with a larger cumulative amount will have a higher chance of being selected as validators for the next block.
This allows blocks to be generated without relying on specialized mining hardware. While ASIC mining requires a significant investment in hardware, staking requires a direct investment in the cryptocurrency itself. Therefore, instead of competing for the next block with computational work, the PoS validator is chosen based on the number of coins staked.
Stake incentivizes those whose coins are being held to maintain network security. However, if the execution fails, their entire stake may be at risk.
Staking works simply to keep funds in a suitable wallet and basically allows every participant to perform various network functions in exchange for staking rewards.
How are Staking rewards calculated?
Staking rewards do not have a specific calculation, but each blockchain network can use different reward calculation methods.
Some calculations will be adjusted on a block-by-block basis and depend on various factors such as:
- How many coins is the validator accumulating
- How long does the validator accumulate?
- How many coins are accumulated on the network in total?
- Inflation rate
- Other factors
Staking rewards are also determined with a fixed percentage for some other networks. These rewards are distributed as a form of inflation compensation to incentivize people to use their coins instead of holding them. This approach helps to increase the use of cryptocurrencies of these coins. A reward schedule will be predicted and it incentivizes users to participate in staking.
Types of Staking
Staking according to the PoS consensus mechanism
Staking according to the PoS consensus mechanism means you need to stake your coins to do tasks related to the project network or validate transactions. In the PoS mechanism, the form of staking plays an important role in proving the ability to process transactions and create blocks. Some Staking projects under the PoS consensus mechanism are TomoChain, IOST, OneLedger (OLT), WAX, Tron (TRX), …
Staking to receive Reward
Contrary to the form of Staking according to the PoS consensus mechanism, Reward Staking is when you lock your tokens in the project ecosystem to receive rewards. The longer the stake, the more rewards you will receive. Suppose, you hold ETH on the exchange to receive more ETH, this additional amount is taken from the exchange’s profits, and has no impact on the project’s Blockchain.
Evaluate the advantages and disadvantages of Staking
Advantages
Increase income during Staking. Instead of owning too many coins on the exchange that have not been traded, you can stake it to receive similar coins. Of course, this is only suitable for people who like to invest for a long time, but if you want to buy and sell continuously, you should not stake.
Staking is more economical than the PoW mechanism. That is, to participate in staking you only need to own a computer with a higher configuration to become the Nodes of the project. While with PoW, you need to have many powerful computers to mine coins.
Staking ensures safety. Partly because it has a backup, the other part is because before staking, participants can actively calculate the profit rate, thereby understanding the unlock time or the sudden unstake case what to do.
What is The Benefit of Staking Crypto Projects?
- Staking in PoS is a way for foundation Blockchains to create decentralization for their network. The power and strength of the network will now be divided among the participants (Node, Masternodes…).
- Take advantage of external resources to operate the network through Nodes.
- Incentives to join the network: Participating in staking and receiving rewards will help participants maintain their activity.
- Network security: To carry out attacks, hackers must hold 51% of the network’s power. Dispersing that power in different nodes will make it nearly impossible to gather their power to create attacks.
- Some impact on the price of the coin
Disadvantages
During the Staking period, you need to lock your coins. Of course, the locked amount of coins is not allowed to participate in any trading transactions on the exchange.
Not to mention, if you unstake before the deadline, you have to wait a long time to get your staked coins back.
Sometimes staking won’t give you the profit you deserve if the coin drops in price.
Should I invest in Staking or not?
Currently, there are many investment methods to profit from the cryptocurrency market. These include Staking (POS), Mining (POW), Trading and even Lending that still exist. In particular, to invest in Mining (POW), we need to equip a lot of machines, but this is not necessarily effective. About Trading, this is a method of making profits from “buy low, sell high”. But this form is not for everyone. Because, not everyone can trade well and the risk is very high. As for Lending, the risk is also very high.
After all, about both the pros and cons mentioned above, Staking is actually still the least risky method that still brings profits to crypto investors.
As an investment, it is impossible to say that there is no risk. Any form of investment must have risks, no matter how small or large. The first risk is security. If you do not secure it carefully, revealing the IP or private key of your wallet, hackers will take advantage of it to steal your assets without your knowledge.
In addition to the security issue, there is also another equally important risk that the coin is depreciated. This is a case of force majeure because it is not possible to withdraw the coin until maturity. When the price increases, we get compound interest, then of course in case the coin price decreases, we will suffer a heavy loss.
Important things to note when investing in Staking
CPI
Calculated based on the ratio of new coins born to the amount of coins in circulation on the market. Cryptocurrency is similar to the traditional financial market, there will always be a number of new cryptocurrencies being born into the market leading to inflation, thereby directly affecting the market price.
Lock time
It is the period where your funds are locked and cannot be moved. This time period is initially selected by you.
Unlock time
Normally you can still stop staking before the allotted time by using the un-stake button. However, you will not be able to get your staked amount back immediately after pressing the “un-stake” button, it will take a certain amount of time.
It is the period where your funds are locked and cannot be moved. This time period is initially selected by you.
Sudden unstakes can affect the normal operation of the network, so this rule was put in place as a way to reduce risk and give the system time to process if the number of requests is high. unstake is too big.
Interest rate
It is the profit rate after the Staking period ends. Of course we want the interest to be as big as possible when participating in staking.
Minimum Required Cryptocurrency
To start participating in Staking, you must meet the minimum amount of coins required by the project. It varies from project to project.
Weight
The higher this Weight value, the larger the number of cryptocurrencies, and the longer the stake, the greater the possibility of gaining the right to process transactions and create new blocks. That means the higher the reward you get.
How to optimize profit when Staking?
Determine the right method
The first is to classify according to the need and amount of coins held:
For those who have a small amount of coins (not enough to be a Node or Masternode):
- The best option is to participate in voting, or Staking on existing Nodes to receive rewards from those Nodes. This form includes Staking right on the wallet, or on some supported exchanges.
- For those who have a small amount of coins, determined to hold for a long time, Staking will help them earn an additional amount of coins during that time.
For those who hoard large amounts of coins:
- They can also apply the above method if they want to be flexible in the process of locking coins. Or you can apply to be Nodes or Masternodes directly involved in transaction processing and block creation.
- This way will help stakers receive more rewards. But of course, there will also be higher requirements for hardware installation and connection.
Steps to Start Stake
Step 1: Choose a cryptocurrency that allows Staking. Consider the indicators above to choose the coin you want to stake: Interest rate, inflation, price, weight, guaranteed to suit your needs, capital and expected interest rate.
Step 2: Install the wallet or configure the computer
Step 3: Load coin into wallet/computer, or exchange to start Staking
If Staking from cold wallets, you must not move them out of the wallet, otherwise you will not receive the reward.
Step 4: Start earning interest.
Above is our explaination for the questions “What is The Benefit of Staking Crypto“. Hopefully after this guide, you can understand this method exactly. Wish you all success and see you in the next guides at our site.
