What is staking crypto? A closer look at the rise of PoS
Edited by Alexandra Pankratyeva
17:09, 18 May 2022
The elevated energy consumption levels of Proof-of-Work (PoW) protocols, such as those used by the Bitcoin (BTC) network, prompted developers to find an eco-friendly alternative to power blockchain-based projects. This resulted in the creation of the Proof-of-Stake (PoS) protocol and, consequently, crypto staking.
In essence, staking cryptocurrency involves acquiring and setting aside a certain number of tokens that will be used to validate the transactions that will be recorded on the blockchain. This innovative protocol, known as Proof of Stake (PoS), is less energy-intensive as it does not require the use of powerful computers to solve complex mathematical puzzles. Instead, those who own a “stake” in the network have the priority to add the next block and are rewarded accordingly.
Many blockchains, including Cardano (ADA), have adopted the PoS protocol to power their networks to respond to growing environmental concerns amid the increased adoption of cryptocurrencies.
In this article, we explain crypto staking in more detail while mentioning some of the best staking opportunities out there.
What is staking crypto?
Staking cryptocurrencies is a process that involves buying and setting aside a certain amount of tokens to become an active validating node for the network. By simply holding these coins, the buyer becomes an important piece of the network’s security infrastructure and is compensated accordingly.
So, what happens when you stake crypto? Staking income is offered in the form of interest paid to the holder, while rates vary from one network to the other depending on several factors.
As the number of PoS-based networks continues to grow, new alternatives to opting to stake cryptocurrency have emerged, including the launch of group staking, also known as staking pools, staking providers, and cold staking. As of 18 May, the list of top Proof-of-Stake (POS) tokens by market capitalisation included 72 coins, which had their own blockchains, according to CoinMarketCap.
Delegated Proof-of-Stake (DPoS) is a relatively new variant of the consensus protocol that aims to increase network security. It allows holders of the network’s token to outsource the role of validation to a delegate. These delegates then form into groups and assume the role of finding a consensus among themselves.
These initiatives aim to democratise access to opportunities in the staking space to retail investors who hold a small number of tokens of a certain blockchain.
How does staking work?
The process of staking starts by buying a certain number of native tokens of a given blockchain project such as Cardano (ADA), Polkadot (DOT), or Solana (SOL). It is important to note that staking can only be done in a network that supports a PoS protocol.
After the purchase is completed, the user now has to lock the holdings by following the procedure indicated by the developers of each particular network. In most cases, a staking transaction can be performed in a few minutes by following the instructions provided by either the exchange or any other protocol that supports this kind of operation.
Cryptocurrency exchanges have facilitated the process of staking tokens by introducing features such as staking pools. These aim to increase the compensation obtained from staking the tokens of a certain network by upping the number of coins staked at a given point in time.
The higher the number of staked coins, the higher the number of transactions a given node will be assigned to validate. Nodes are ranked, in most cases, based on the number of tokens they hold.
As a result, the nodes that hold the largest number of tokens will often process the largest number of transactions, which is the reason why staking pools have become popular.
On the other hand, a user can stake tokens for a certain period – known as fixed staking. Some providers also offer a more flexible scheme in which the user can withdraw their tokens at any given point. This is known as flexible staking.
The rigid nature of fixed staking results in higher crypto staking returns offered to the holder, while flexible staking tends to offer less attractive terms.
What crypto can you stake?
Only the native tokens of blockchain projects that are powered by the PoS protocol offer the possibility of staking. As of 18 May, the top five most valuable staking tokens by market capitalisation included Cardano (ADA), Near Protocol (NEAR), BitTorrent (BTT), Mina (MINA) and Ankr (ANKR), according to CoinMarketCap.
The most prominent smart contracts network in the crypto space – Ethereum (ETH) – has been working on migrating to a PoS protocol but this operation has not been completed yet.
Best staking coins 2022
#1 – Cardano (ADA)
Cardano (ADA) is considered the pioneer of the PoS protocol and one of Ethereum’s competitors in terms of creating blockchain-powered smart contracts.
The Cardano network was developed by Charles Hoskinson and named in honor of Gerolamo Cardano, a renowned Italian mathematician. Cardano’s Ouroboros protocol claims to be “the first provably secure proof-of-stake protocol, and the first blockchain protocol to be based on peer-reviewed research”.
According to Cardano’s staking calculator, 10,000 tokens invested for a year should yield an annual return of 4.6% if the investor opts to delegate his stake for other validators to use it on their behalf.
#2 – NEAR Protocol (NEAR)
The NEAR Protocol (NEAR) is a layer-one blockchain that seeks to provide developers with a much faster network on which they can rely to power their decentralised applications (dApps).
The developing team behind NEAR has created a consensus mechanism known as Nightshade to allow validators to process transactions in parallel. This helps to eliminate queues and increase transaction speed while reducing costs.
The project claims to reduce the average processing time of other blockchains by at least 1,000 times while developers who rely on the network are compensated with 30% of the collected transaction fees.
The rewards earned by those who stake NEAR – the native token of this blockchain project – are proportionate to the total amount of tokens staked to the network. For example, if there are 1,000 tokens staked and a user has staked 100 of them, they can earn 10% of the total rewards, which are distributed to the network.
NEAR Protocol (NEAR) live chart
#3 – BitTorrent-New (BTT)
BitTorrent has been a popular file-sharing network for decades, even before blockchain technology was conceived. Users rely on this application to exchange computer files such as movies, documents and audio. There are both seeders – those who make the files available so others can download them – and leechers – those who are downloading the files.
Interestingly, BitTorrent is a decentralised project per se as many seeders can participate at the same time to provide tiny bits of a particular file to a leecher.
In 2018, the app was acquired by TRON (TRX), a layer-one blockchain project. The BTT token was created as a TRC-10 asset powered by TRON. The token can be used to pay for some of the premium services offered by BitTorrent.
According to data from DLive, a blockchain-based streaming service created by BitTorrent, 5% of all donations and subscriptions received by the platform are distributed among BTT stakeholders. Thus far, this has resulted in annualised returns of 2.4%.
BitTorrent (BTT) live char
#4 – Mina (MINA)
Mina’s (MINA) developers claim that their project is the “lightest blockchain protocol” in the world. The reason for this is that the project’s software development kit (SDK) – a set of tools provided to developers who want to develop their applications by relying on Mina’s decentralised network – is only 22KB compared to other SDKs that could weigh hundreds of gigabytes.
After running multiple testnets, Mina’s mainnet was successfully launched in March last year and there are currently 265 active validators who keep the network safe and efficient.
According to the project, Mina’s annual inflation is 12% and it is also possible to earn up to 24% per year. These special rewards are known as “supercharged bonus rewards”.
#5 – Ankr (ANKR)
Ankr (ANKR) is a layer-one blockchain powered by a PoS protocol that provides an ecosystem on which developers can build their decentralised applications. Ankr relies on its extensive network of validators who provide the required infrastructure to power the Web3 projects.
Ankr’s native token, ANKR, is used to pay for the blockchain’s premium services and transaction fees. The token can be staked.
Through the Ankr Earn users allow investors to stake ETH tokens via a synthetic asset called aETHc. According to the project’s official website, the annual yield for staking this token is approximately 4.2%.
Benefits and risks of staking crypto
What does it mean to stake crypto? Is it really a good idea? Staking crypto means that the investor gives validators within the network the right to use their stake to process some of the transactions that need to be recorded on the blockchain.
There are two main benefits of staking crypto. First, the investor is compensated for staking their tokens, which could be considered as earning a passive income.
Second, users can contribute to making the network efficient by staking their assets as validators will be able to process transactions faster.
However, crypto staking returns don’t come without risks as multiple factors could affect the performance and security of your staked tokens.
The first risk to mention is the possibility of a cyber-security incident that could result in the loss of your tokens held within a certain exchange or online wallet. To eliminate this threat, some crypto investors have turned to cold staking – an activity that involves storing your tokens on a piece of hardware like a hard drive.
Cold storing your crypto assets protects your holdings from a cyber attack, as the hardware will not be connected to the internet. However, the loss or damage of the hardware remains a risk when using this form of staking.
Another risk of staking results from potential downturns in the price of the crypto asset during the staking period. Since staking works by locking your coins, you will be unable to liquidate your holdings in case the market goes down and, therefore, you are exposed to the risk of losing a portion of your principal without being able to trim those losses by selling your coins.
It is also important to note that some networks may cause severe inflation as a result of elevated staking rewards. Inflation in cryptocurrencies refers to the creation of new tokens to compensate validators for their effort. If the number of tokens created is too high, it can dilute the value of the project unless the demand for the token rises at the same pace.
A worthy source of passive income or a risky practice?
Crypto staking has attracted investors seeking to earn income from holding cryptocurrencies – similar to how a bond or high-dividend stock would work.
The attractive Annual Percentage Rates (APRs) offered by some tokens have attracted billions of dollars. According to Staking Rewards, as of 18 May, the APR for the top 10 crypto assets by staked value ranges from 4 to 13%.
PoS protocols have also relieved some networks from environmental concerns resulting from the energy-intensive nature of the traditional PoW mechanism.
Like any other form of investing, crypto staking comes with risks, including the possibility of losing the coins held in your online wallet in the event of a cyber-security breach or a loss in principal resulting from a sharp downturn in the token’s price during the lockup period.
You should analyse the risk / reward ratio of staking based on market conditions, the network’s reliability, and the rewards offered by the blockchain for setting aside your coins to make sure you get an adequate compensation for the risks you are taking.
Always conduct your own analysis before staking a coin. And never invest more than you can afford to lose.
Is it safe to stake crypto?
Staking crypto carries multiple risks, including the possibility of experiencing tangible losses that the investor will not be able to trim if the tokens remain locked during the staking period.
Moreover, the rewards obtained for staking may fluctuate over time depending on market conditions and certain project-specific developments.
What are the benefits of staking crypto?
Staking a coin can be an effective way to generate passive income on your crypto investments. In addition, investors actively contribute to securing the project’s network if they stake their tokens.
Markets in this article
Bitcoin / USD
Cardano / USD
Polkadot / USD
Ethereum / USD