A pretty good and gaining momentum alternative to mining today is crypto staking. The reward may actually be decent, but at the same time users may not purchase expensive equipment.
Depending on the chosen crypt and the retention period of the coin, the % of income may be different. At the same time, in order to understand how staking works, you first need to figure out what it is in general.
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So, what is cryptocurrency staking?
In simple words, staking (from the English stake – “bet”) is a passive income that holders of cryptocurrencies receive through the usual storage of coins. This process involves the use of the Proof of Stake algorithm. It is worth noting that the PoS algorithm is an effective way to protect the blockchain from unauthorized interference and the untruthfulness of the posted information.
Users who choose a blockchain with Proof of Stake and store cryptomonets on their wallets receive a reward for this. Thus, they become active participants in the staking process and thereby ensure the maintenance of the blockchain.
The Proof of Stake algorithm is characterized by the following principle of operation: the size of the amount stored by the system participant directly affects the number of blocks generated (the higher the amount, the more blocks).
PoS, which makes staking available, is used in the work of such cryptocurrencies as:
- DASH
- DEL
- SOLANA
- COSMOS
- ALGORAND
- TEZOS
- EOS
- TRON
- CARDANO and so on
One of the main advantages of staking is that it is a worthy competitor to mining. At the same time, holders of crypto can earn money without the need to purchase specialized expensive equipment.
What is the difference between staking and mining earnings?
Classical mining is understood as the process of maintaining network operability, which is based on a special Proof of Work (PoW) blockchain protection algorithm. The users involved in this process are called miners. Their task is to generate the blocks necessary for collecting and storing data about transactions and accounts.
To generate a new block, the user must perform special calculations, as well as determine a secret combination of characters.
Today, the performance of a simple PC is no longer sufficient to maintain the proper level of computing power in order to obtain blocks of the bitcoin network. Because of this, professional miners are forced to purchase expensive special equipment.
Thanks to the use of the PoS algorithm, users were able to avoid such difficulties. In order to receive passive profit, network participants only need to store cryptomonets on their wallet or on a specialized platform, without using these funds.
Assets on the account can be multiplied, which further increases the chances of getting a block. The process itself does not require the use of heavy-duty equipment, which is why the entry threshold will be much lower in staking than in mining. Moreover, certain types of coins have a low cost, so even users with minimal capital can receive remuneration for their storage.
At the same time, it should be understood that certain types of projects in staking are characterized by the need to have a fairly large amount on the account. Moreover, sometimes the amount of capital may exceed the cost of mining equipment. Therefore, the entry threshold in this situation will also be higher.
Types of staking
According to the principle of operation, this type of passive earnings is similar to a deposit in a bank: a depositor deposits funds into an account without being able to use them for a certain period of time and receives passive profit. The larger the amount on the deposit, the more money he will receive.
Along with the standard circuit work, there are individual conditions in the staking of some blockchains.
Locked Staking
Working in a fixed staking, the crypto holder must specify in advance the term for placing the asset on the account. Token holders have the opportunity to determine the most comfortable period, but they will no longer have the right to change it. For example, if 3 months were selected, then the user will be able to withdraw funds only after a quarter has passed.
The fee here is fixed. Such contracts are conditioned by a higher interest rate, so this type of staking is more suitable for network participants who want to get the maximum profit.
Let’s analyze ETH 2.0 as an example of fixed staking. To become a member of the blockchain (validator), the user must top up his account with at least 32 ETH. The annual rate will be 2%-20%, which depends on the total number of cryptocurrencies blocked for staking. Here we can see an example of a higher entry than in mining.
Flexible Staking
When placing funds indefinitely, the user does not specify the end date of the content of the coins. In this case, you can exit the validation process at any time. Interest accrual is carried out until the coin holder withdraws tokens or opens a sell order.
As a rule, users begin to receive funds to the account after 24 hours from the moment Flexible Betting (indefinite contract) was opened. However, payments are not made daily, most often – 1 time in 30 days.
This type of staking will appeal to users who do not want to freeze their assets for a long time and are accustomed to flexible management of them. The funds stored on such a wallet bring passive profit, and you can pick up coins at any time.
DeFi-staking
A type of passive earnings in decentralized finance systems, carried out by holding tokens and coins in pools. The basis of DeFi projects is the use of smart contracts. Their advantages are to ensure that transactions are made automatically, provided that the conditions for their execution are met in advance.
This type of staking differs from the traditional one by involving third parties in the process (independent users or companies taking the crypt at % from the owner).
This type of staking is interesting to many users because it:
- Allows you to withdraw funds quickly
You can collect your daily accrued % within 24 hours. That is, the participants of the system are not required to wait a month to use the earned funds.
2. Provides higher profitability
The entry threshold is lower here, and the percentages are higher. Working with traditional blockchains that use Proof-of-Stake, it is quite difficult to earn over 10 percent per year. On DeFi, the user has the right to expect up to 100% profitability, depending on the term and the chosen crypt.
3. Guarantees payments
A vivid example of this is Binance BNB Betting. Here, users are protected not only by smart contracts, but also by the authority of the site.
How to choose the right coin and start staking
The first step is to buy or accumulate tokens. They will act as a free asset. At the same time, the project participant should not suffer significant damage from the loss of the value of tokens.
Note! It is not necessary to accumulate a large stock of funds for staking.
The blocking of crypto for a specific period should be planned in advance, comparing the conditions of staking on different services. Preferably, the total profit is formed on the basis of payments for several tokens at once. This will allow the depositor to reduce risks – when one coin subsides, the other will show higher quotes.
The coin is selected taking into account such basic factors as:
- minimum contract amount;
- volatility.
Considering the same example with Ethereum 2.0, it can be noted that not every user is able to afford to block as many as 32 ETH.
In addition, it is very important to pay attention to the trading volume. The higher the cryptocurrency asset will be, the higher this indicator will be. Experts also advise to redistribute the portfolio at least once a quarter.
