What is staking
Staking is the act of holding and locking a certain amount of coins to receive rewards from them. This amount of coins can be locked in the wallet or nodes of a blockchain project over a period of time. The reward will be based on the effort the user has spent including the number of coins staked & stake duration.
Proof of Stake is the consensus algorithm in the blockchain. In it, participants will stake their coins on the Blockchain network to authenticate transactions and create new blocks. Rewards (including Block rewards and transaction fees) will be given to PoS participants to motivate their contributions.
Staking in the PoS consensus mechanism
This means that a certain amount of coins will be wagered to secure a certain task. In the PoS mechanism, locking the coin ensures and prove the ability to process transactions into creating your block, while also receiving rewards with effort. This Staking action directly impacts the blockchain network.
Examples include Blockchain Platform projects such as TomoChain, IOST, OneLedger(OLT), WAX, Tron (TRX) ,…
Note: PoS is the most general and general consensus mechanism of the form of “Bet coins to perform tasks”. In addition, it has many other variants such as PoSV, DPoS,… However, they all work based on cryptocurrency betting.
Staking to receive rewards
Users will use their tokens to “stake” back into the ecosystem of the project. This Staking is not directly involved in the authentication of transactions or any tasks related to activities in the network. However, the project is still called “stake”. In fact, it means more like “lock.” The longer the user locks, the more rewards they receive.
For example, Stake KCS on the floor (Hold) to receive additional KCS bonuses. The amount of KCS as a reward is derived from the profit earned by the exchange and not from the creation of new blocks or transaction fees.
KCS is the ERC-20 Token on Ethereum and the fact that Staking KCS does not need any impact on Ethereum’s Blockchain network.
How does Staking work?
The Proof of Work blockchain relies on mining to add new blocks to the blockchain. In contrast, proof-of-stake blockchains create and validate new blocks through the Staking process. Staking is conducted with validators locking their coins so that they can be randomly selected by the protocol at specific time intervals in order to create a Block. Typically, participants with a larger bet amount will have a higher chance of being selected as the confirmer for the next Block.
This allows blocks to be created without relying on specialized mining hardware, such as ASIC. While MINING with ASIC requires a significant investment in hardware, Staking requires a direct investment in the cryptocurrency itself. So instead of competing for the next Block with computing work, the PoS validator is selected based on the number of coins they are depositing. The “stake” is what encourages validators to maintain the security of the network. If they fail to perform, their entire stake could be at risk.
While each Proof of Stake Blockchain has a specific wagering currency, some networks adopt a two-token system in which the reward is paid with a second token.
On a very practical level, Staking simply keeps the money in a proper wallet. This basically allows anyone to perform different network functions in exchange for Staking rewards. It may also include depositing money into a Staking pool.
What is a staking pool?
A Staking pool is a group of coin holders who consolidate their resources to increase their chances of validating blocks and receiving rewards. They combine their Staking powers and share the rewards corresponding to their contribution to the team.
Establishing and maintaining a Staking pool usually requires a lot of time and expertise. Staking pools tend to be most efficient on networks where barriers to entry (technical or financial) are relatively high. As a result, many pool providers charge on staking rewards distributed to participants.
In addition, pools can provide additional flexibility for individual depositors. Usually, the stake must be locked for a fixed period of time and usually, there is a withdrawal time, the time of delisting the link is set by the protocol. Moreover, there is almost certainly a significant minimum balance that needs to be deposited to discourage toxic behavior.
Most Staking pools require a low minimum balance and no additional withdrawal time is required. Therefore, joining a Staking pool instead of a single bet may be ideal for new users.
What is Cold Staking?
Cold Staking refers to the process of Staking on a wallet that is not connected to the Internet. This can be done using a hardware wallet, but also with air-gapped software wallets.
Cold Staking-enabled networks allow users to make a deposit while keeping money safely offline. It is worth noting that if the depositor moves the money out of the cold storage, they will stop receiving the reward.
Cold Staking is especially useful for big bettors who want to ensure maximum protection of their money while still supporting the network.
Benefits of Staking
The following are some benefits for operators with the Staking mechanism.
- The PoS consensus mechanism eliminates dependence on high-end computer hardware. When a mining node is bound by a digital wallet, it is guaranteed a fixed percentage of transactions on the network regardless of its processing power.
- Investors holding sufficient amounts of cryptocurrencies can confirm transactions on the network.
- The value of assets bet via PoS does not depreciate over time like ASIC machines and other mining hardware. This value can only be affected by the volatility of the market price.
- PoS is a more environmentally friendly and energy-efficient form of consensus mechanism than evidence of PoW work mining, which is still used in the Bitcoin network.
- Reduce the threat from attacks by 51% in the network.
In particular, the most noticeable main benefit of Staking is that it eliminates the need to invest in expensive hardware equipment. This system offers guaranteed profits and predictable sources of income for operators, while with proof-of-work mechanisms, the bonuses are random for the highest-level computer systems.
Staking is a form of investment that delivers a steady return, but they have certain risks:
- During Staking’s time, the coins participating in the stake were locked. You won’t be able to do any buying/selling or trading with these coins. The un-stakes will prevent you from achieving the rewards you originally expected. To un-stake you will also have to take some time to retrieve the coins you took away the stake. Maybe when you get those coins, the opportunity is lost.
- Staking doesn’t always have words. The biggest risk is that the price of the coin goes down.
For example, you stake 1,000 X coins ($0.1/X) at an interest rate of 30% per year. By the time the profit is received, the total number of coins received will be 1300 X coins. But if the price is only $0.07/X, the total value is now $91 (less than the original $100 invested).
Staking’s impact on coin prices
The fact that Staking users for projects use the PoS consensus mechanism is decisive for the entire blockchain network. But for projects that adopt the PoS mechanism, when starting to allow Staking, how does it affect the price of that coin?
Some impact on supply and circulation: The number of coins taken away from the Stake will be locked during that period. This means that these coins cannot be used on exchanges. Therefore, it causes the number of coins circulating in the market to decrease.
Basically, when the supply in the market decreases i.e. its scarcity increases, it will cause the price to rise. This is the basic law of supply and demand.
Specific examples with TOMO coins:
- On December 10, 2018, TomoChain announced a program for candidates to run Masternode.
- On December 14, 2018, TomoChain officially launched Mainnet and allowed the Masternode stake in TOMO coins. At the same time, other users vote for these Masternodes.
- August 8, 2019. There are 39,851,005 TOMO (accounting for 64.5% of total traffic in the market) being staked to participate in the PoSV consensus mechanism. TOMO prices increased by up to 30% between the start and the time Staking was allowed.
- TomoChain uses the PoSV (Proof of Stake Voting) consensus mechanism. This means that there will be Masternodes responsible for authenticating transactions into creating blocks. It requires 50,000 TOMO to become a candidate.
- Other users can use TOMO to vote for their candidates. If the candidate becomes Masternode, they will also receive the corresponding reward.
- Tomo’s 300% price increase is not entirely due to the impact of Staking. Obviously, during this time, the TOMO price also goes up and down several times. However, the impact of Staking on the price of TOMO is real and relatively clear as its total circulation has decreased by 64.5% due to its participation in Staking.
See also: What is a smart contract?
Parameters to keep in mind when Staking coin
Calculated based on the ratio of newly born coins to the number of coins in circulation in the market. The cryptocurrency market is similar to traditional financial markets, there will always be a number of new cryptocurrencies being introduced into the market leading to the phenomenon of inflation, thereby directly affecting market prices.
It’s the period of time that your money is locked in and can’t be moved. This time is your original choice.
Usually, you can still stop staking before the specified time by using the un-stake button. However, you will not be able to get back the staked amount immediately after pressing the “un-stake” button which will take a certain amount of time.
A sudden un-stake can affect the normal operation of the network, so this rule is set out as a way to minimize risk and give the system time to process if the number of un-stake requests is too large.
For example, in TomoChain, people who vote for Masternode if they want unstake will receive it after 48 hours. For Masternodes that want to stop working, they will only receive TOMO after 30 days.
That’s the rate of return after the Staking period ends. Of course, we want the interest rate to be as big as possible when joining Staking.
The minimum required cryptocurrency amount
To start participating in Staking, you must meet the minimum number of coins that the project requires. It varies depending on each project.
For example, TomoChain requires 100 TOMO, and Decred (DRC) needs a minimum of 5 DRC to start Staking.
The higher this weight value means that the greater the number of cryptocurrencies and the longer the stake time, the greater the likelihood of winning the right to process transactions and create new blocks. This means that the higher the reward you get.
Optimize profitability when Staking
Identify the right method
The first is to categorize by demand and number of coins held: For those with a small number of coins (not enough to make a node or Masternode):
- The best option is to participate in voting, or Staking, into existing nodes to receive rewards from those nodes. This form includes Staking right on the wallet or on some support decks.
- For those with small, long-term Hold defined coins, Staking will help them earn an extra amount of coins during that time period.
For those who hoard large quantities of coins:
- They can also apply the above method if they want to be flexible in the locking process. Or you can apply as nodes or Masternodes directly involved in processing transactions and creating blocks.
- This will help the staker get more rewards. But of course, there will also be higher requirements for hardware installation and connectivity.
Steps to take
For both groups above, the following steps need to be taken:
- Step 1: Choose a coin with a Staking mechanism. Of course, before choosing to consider the above parameters (inflation of the coin, coin price, interest rate, weight) to balance your needs, capital, expectations, and interest rate expectations.
- Step 2: Install the wallet or configure the computer to prepare for the Staking.
- Step 3: Load the coin into your wallet/computer or floor to start Staking. For cold wallets, always make sure this wallet is connected to a network environment 24/7.
- Step 4: Wait for the coin to mature and start receiving interest.