Crypto Basics — What is Staking?

This post was originally published on eqifi

Maybe you’ve heard the term “staking” as a way of earning returns on your cryptocurrency. Let’s explore precisely what it is and why and when it is required of a blockchain network. Then we’ll discuss the advantages and disadvantages of staking your coins, as well as giving a quick-start guide to staking.

The Basics

It is not available for all cryptocurrencies, however. Proof of Work (PoW) blockchains such as Bitcoin do not offer staking since the network is secured and transactions validated through a consensus model called “mining,” which involves powerful computers solving complex mathematical problems. Another model — and some would say a more advanced, more eco-friendly, or at least faster, more scalable method — for verifying transactions on a blockchain is Proof of Stake (PoS). Staking is available for these blockchains.

Staking is a process by which any holder of a set minimum amount of cryptocurrency coins may lock up the required number of coins in a specific kind of wallet that is continuously online in order to secure the network. As a reward for locking up your funds, the staker earns a passive income in the form of an interest percentage. How much you can make from staking will vary, depending on the length of time your coins are staked and which network you stake with.

Staking a minimum number of coins — such as 32 for the Ethereum network — establishes you as a validator on the blockchain. Proof of Stake (PoS) blockchains such as Cardano, Polkadot, and soon-to-be Ethereum require staking validators for consensus. This means the network relies on validators to verify transactions on the blockchain. You can think of this kind of blockchain as an Excel sheet with all transactions recorded, where those staking are the bookkeepers.

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In the case of staking Ethereum, after the minimum 32 ETH are locked up in a unique wallet, validators are chosen randomly to create blocks. They must also confirm blocks they do not create, contributing to the security of the protocol.

When Ethereum completes its major upgrade to Ethereum 2.0, it will operate exclusively by a Proof of Stake (PoS) consensus method, though it is possible to stake your ETH now. At the time of writing, the network still requires miners as it transitions from a Proof of Work (PoW) to a PoS model. After Ethereum 2.0 is achieved, the network will arguably have a more accessible entry point than Proof of Work (PoW) protocols like Bitcoin, which, through its consensus method of mining, including the use of expensive ASIC equipment, is financially prohibitory for most individuals.

Although independently participating in Ethereum’s consensus requires a minimum of 32 ETH to be locked, there are several available services from well-known crypto exchanges and others that operate pools for staking, joining your coins with others until they have attained the minimum amount to stake. This method of pooling coins allows individuals to stake a lower number of coins than the minimum. Keep in mind that the percentage you can make by using one of these exchanges or services will be lower than the percentage the service is receiving from your pooled coins, hence their profit margin.

It also means that you will not be acting as a full validator node. Think of this setup as opting to earn a lower percentage of rewards as a Bitcoin miner participating in a Bitcoin mining pool, so you don’t have to invest in expensive ASIC equipment.

Diving into the Liquidity Pools

Contributing stablecoins to the liquidity pools on DeFi platforms has become a popular and possibly less risky way of earning passive income. Most involve stablecoins such as Tether (USDT) and USD Coin (USDC). This is usually a safer option, as stable coins tied to a fiat currency may be less volatile. The average rate on returns from these platforms ranges from 3 to 10% annually.

Conversely, this will not provide an opportunity for some of the asymmetrical gains we have seen through the rise of certain cryptocurrencies. Those new to the space may prefer to place their crypto assets with minimal risk, while more experienced users may prefer other DeFi options offering higher gains. Each of us will need to assess our own particular risk tolerance level.

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Advantages & Disadvantages of Staking

  • Earning rewards for locking up your coins for a set period of time. The amount of time will vary, according to the blockchain. For instance Ethereum offers a 24 month plan.
  • Satisfaction in knowing you are taking an active part in supporting and securing the network, as a validator on a more eco-friendly platform.

The disadvantages to staking include:

  • Locked coins cannot be moved, once they are committed to an ecosystem.
  • Committing to support one blockchain through staking may be risky. Remember this agreement cannot be broken, and settling on the right protocol to stake on can be a complex issue with many variables. What are the typical rates of return? How long will your coins be held and unavailable?

How to Stake: A Quick Start Guide

“Never invest in a business you cannot understand.” — Warren Buffett.

Choose a wallet. Most cryptocurrencies that can be staked have a dedicated wallet that must be used by its validators while staking. Be sure your computer has the required space and power specifications to run the required applications before committing. Some coins may be staked on hardware wallets, offering a higher level of security.

Once you have chosen your coins and wallet, you may purchase your preferred coins on a cryptocurrency exchange. Ideally, start with one of the most well-known and most secure, which would also most likely have the most user-friendly UX.

Full individual staking — such as Ethereum staking of 32 Ether — requires a consistent internet connection, with your computer running 24 hours a day, seven days a week. WiFi connections are often not reliable enough for staking. Some use dedicated laptops that stay plugged into their modem; others stake from a Virtual Private Server.

When you are prepared, send your chosen cryptocurrency from the exchange where you purchased them to your proper wallet to begin staking. Make sure to check your staking wallet at regular intervals in case power is lost or there is a problem with the network. Network issues tend to arise less with more established networks like Ethereum.

And if you prefer to provide liquidity of stablecoins or other cryptocurrencies through a DeFi platform, choose these with care. DeFi platforms are susceptible to hacks and vary in how easy to use they are.

The EQIFI Opportunity

The EQIFI protocol allows pooled lending, borrowing, and investing for ETH, ERC-20 tokens including wBTC, Stablecoins, and select fiat currencies. It also provides a platform for DeFi products with the ability to apply for EQIBank accounts, loans, custody, debit, and credit cards.

EQIFI is a single source for the most popular, practical, and profitable financial products all on one platform. These work together to provide a complete ecosystem of next-generation financial products.

Learn more about how you can earn higher returns by staking and other innovative ways of earning passive income at EQIFI.

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Originally published at https://www.eqifi.com on October 12, 2021.

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