Updated: Jul 13, 2022
By the end of Q3, 2022 Ethereum is expected to transition from Proof of Work to Proof of Stake. This means that it will become a more environmentally friendly project, but also that it will be fully subjected to staking. This way to earn passive income without needing to sell crypto offers an attractive interest rate and doesn't require a big investment. You can participate as a validator or as a delegator, but be sure to choose the right coin and the right platform. In this article, you will be guided through the main concepts of staking and will be provided a road map to start your staking journey.
Author: Carmen Rodríguez
Proof of Stake and Proof of Work
There are two major ways to create new blocks in the blockchain. The first one was developed by Satoshi Nakamoto – it is called Proof of Work (PoW). In order to validate transactions, complex mathematical equations need to be solved by powerful computers.
The other consensus mechanism is Proof of Stake (PoS) which was created by Scott Nadal and Sunny King. In PoS the transactions are validated based on the number of coins someone owns. The person who owns the coins is called the validator.¹
What is staking
It is similar to investing your money in a high-yield savings account. The goal is to make the network attractive and uncorrupted. The more people that purchase and lock their assets, the stronger the network becomes against malicious activity. As a reward for the commitment of the investors, they receive some original currency (see figure 1). In order to propose a new block and win a reward, you need to offer a big stake. That's why validators usually gather funds from different holders.²
As we just said, sometimes several holders gather together their cryptos in order to achieve a bigger stake. The validator is the one who owns the staking node and therefore has privileges such as voting rights and bigger rewards. But great power comes with great responsibility. The validator needs to have the hardware always online and invest really high sums. For example, by the time of writing this article you need to commit at least 32 ETH ($150,000) for validating Ethereum 2.0.
When you are not the validator, you are delegating. This is a great option for smaller investors, that allows them to not be preoccupied with maintaining the node and after paying a small commission they also get their reward.³
Is liquidity mining the same as staking?
These two terms can be easily confused since in both the holder gives their coins for an amount of time and then gets them back with interest. Nevertheless, the goal is completely different. In staking, the purpose is to secure the network. In liquidity mining, the holder is lending the crypto to a decentralized exchange (DEX) or lending platform that will again lend the tokens to other holders for a fee. Regarding profitability, liquidity mining is more lucrative but also riskier.⁴
Which coins allow staking
All the cryptos that use Proof of Stake are capable to be staked. This means you won't be able to stake Bitcoin, but there are many other great options such as:
Ethereum 2.0 (ETH). Customers who stake ETH2 receive up to 5% per year.
Cardano (ADA). It enables smart contracts, lending, trading, asset management and more. (ROI 5%).
Solana (SOL). Open-sourced project that enables scalable, user-friendly apps (7% ROI).
Tezos (TRX). It can execute peer-to-peer transactions and serve as a platform for deploying smart contracts. (5-6% ROI).
Avalanche (AVAX). Can process up to 4,500 transactions per second and has considerable growth potential. (ROI 9%).⁵
When staking, it is really important to choose an adequate platform, since this will set the fees you will have to pay and the cryptos you can stake.
One of the most famous is Coinbase. This platform is perfect for beginners since it has a really intuitive interface, nevertheless, the staking fee is around 25%. It provides many educational resources and the payments are frequent, but it has a limited selection of cryptos to stake.
Another great option is Binance. If you are looking for fewer fees, this platform has a 0% staking fee and you can stake up to 100 different coins. But you won't be able to stake with stablecoins and the reward payments are done once a month.
Last but not least, we have Pancakeswap. In 2021 it was one of the most profitable platforms and apart from staking you can also exchange tokens. It has 20 different cryptocurrencies to stake, more than Coinbase but less than Binance. The staking fee is 0-0,1% and the average percentage yield is 60%.⁶
How to stake cryptocurrency?
The first step is choosing a coin, to do that you will have to do some research and understand their long-term value. Then you have to buy the coin selected through a crypto exchange. Once you have the coins in your wallet, you can check the waiting periods and lock them. After a day or a month depending on the investment you will start getting rewards.⁷
Mining vs staking
On one hand, the mining process is in general more profitable, and your rewards are more secure than in a staking pool where the validator can make a mistake.
On the other hand, it’s expensive. You will require software, a cooling system and a lot of electricity. Furthermore, there is a lot of competition in popular coins such as Bitcoin.
Staking presents itself as a cheaper alternative, your only investment will be the assets you want to invest. It requires very little electrical power, which means that it is more environmentally friendly. Lastly, the popularity of this method keeps growing and more staking translates to more rewards.⁸
Staking has emerged as a strong alternative to mining thanks to the fewer entry barriers for investors. For Ethereum, the environmental side was important enough to transition to Proof of Stake but The Merge has been going on for more than 3 years now and has been recently postponed. There are still plenty of coins that require mining, so both are still needed and it depends on the investment model you are looking for.
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Carmen Rodriguez is the executive assistant at basenode.io and community manager. Before, she worked in educational entrepreneurship for one year. Besides her degree in business administration, she holds a master's in social innovation. You can contact her via LinkedIn.