Staking: what is it, how does it differ from mining and how to make money on it?

What is staking? The principle of operation

Staking (from the English stake - “bet”, “part of the profit”) is nothing more than receiving passive income from storing cryptocurrencies using the PoS algorithm (proof of ownership) and its other variations.

Staking is also considered to be a real alternative to mining, which also allows you to earn on cryptocurrencies.

The essence of the process can be expressed in one sentence — this is the retention of coins on a crypto wallet for further obtaining permission to participate in the mining of cryptos and subsequent profit. The amount of profit depends on your balance — the higher it is, the more you can earn. This is possible due to the use of the Proof of Stake consensus algorithm, which works like a deposit or the purchase of shares, as a result of which you receive bonuses.

The methodology and income from staking may differ, depending on the network you will use. But a weighty argument in support of staking will still be its profitability, because unlike mining there is no need to buy expensive equipment, but the income will be the same or even more.

Proof-of-Stake (PoS) algorithm. How does PoS staking work?

The history of the Proof-of-Stake consensus mechanism (from the English proof of stake - proof of ownership) begins in 2012, when this mechanism was first used in the PeerCoin cryptocurrency. The main idea is to use the so—called "stake" as a means of determining the node that receives the right to mine the next block.

In PoS, the authenticity of transactions is sorted out depending on the number of coins that are in its wallet. The algorithm hashes information about this operation with further confirmation of the validity of the operation and updating the entry in the blockchain.

The complexity of mining and profitability in Proof-of-Stake are inversely proportional to the number of tokens that belong to the owner of a particular pool or node.

When using the PoS algorithm, no special equipment is required, therefore, compared with mining, pool members are called forges (from the English forger - “blacksmith”), and not miners. Forgers' reward is limited to transaction fees, but the income depends on the "age" of the coin, which is received by multiplying the total volume of coins by the period of their storage by one forger.

Anyone can become a forger, the only and important condition is to have a certain amount of coins on your wallet, which varies depending on the network.

In general, pure PoS is rarely used,  its various modifications are often used:

• LPoS (Leased Proof-of-Stake) - leased proof of stake;
• PoSV (Proof-of-Stake-Velocity) - proof of speed;
• Proof of Space - proof based on the amount of disk space;
• Proof of Storage - proof of the fact of storing the full volume of blocks and others.

The PoS consensus algorithm and its variations are used by cryptocurrencies: EOS, NEM, Lisk, Waves, Cardano, QTUM, Bitshares, Nxt, Stratis, OmiseGo, etc.

What is Delegated-proof-of-stake (DPoS)? Staking on DpoS

A year later, after the first use of PoS, in 2013 Daniel Larimer developed a new type of Proof-of-Stake, which was called Delegated-proof-of-stake, abbreviated as DPoS. With this algorithm, participants can use their tokens to select validators to validate and add blocks for a reward.

In Delegated-proof-of-stake, those wallets that have coins on their account can take part in voting for "delegates", that is, for community representatives who have the right to create blocks and receive bonuses - commissions from transactions. Delegates can set up network rules, keep the blockchain running smoothly and generate blocks. It is important that any member of the network can become a delegate, but such participation can only be for a short time.

Users engaged in staking, as well as those who have a chance to become a delegate, got their name — witnesses. The name is not in vain, since these users directly witness the transaction, and also at the same time are nodes of the network.

Delegated-proof-of-stake uses a reputation system to select witnesses and delegates, as well as real-time voting.

There are 2 types of coins in DPoS: free, that is, those that are in circulation, and coins that take part in staking.

Types of staking

I. Depending on the storage period, staking can be:

• Fixed (Locked Staking). When choosing such staking, you must immediately specify the period for which funds will be placed on the account, since it is impossible to get them back earlier. For example, if you fixed the period for 6 months, then after 5 months you will not be able to pick up your coins. It is worth pointing out that the staking fee will also be fixed, but the interest rate of such contracts is quite high, so this option is often chosen in order to get more profit.
• Perpetual (Flexible Staking). The end period for storing coins is not indicated, and the user can withdraw his/her funds at any time. Rewards are accrued until all coins are withdrawn, or an order for the sale of tokens is opened. Within 24 hours, the first reward comes, while the payment is not daily, often it happens once a month. Perpetual contracts are more suitable for people who like frequent changes and receive passive income regularly.

II. Depending on where staking is carried out, there are such types of it:

• DeFi- staking. The main difference between DeFi-staking from the usual one is that third parties can take part here, they can be, for example, companies that are engaged in lending, insurance, forecasting, etc., while they work on the blockchain.

DeFi staking is popular because it has a number of advantages:

1. Instant withdrawal of funds - within 24 hours you can pick up your earnings, which are accrued daily. There is no need to wait a whole month for payments.
2. High profitability — the threshold for entering DeFi-staking is much lower than in others, while higher percentages of earnings are accrued. Choosing a DeFi, the right coin for stacking, as well as the term, you can passively earn 100% per annum and even higher, while with conventional blockchains on PoS it is quite difficult to earn more than 10% per annum.
3. A guarantee for payment — for example, in Binance BNB Betting, the user is protected by the authority of the platform, in addition to the main smart contract.

But here it is also not without risks that are possible if a vulnerability is found in smart contracts, which can lead to the complete loss of all coins by the user.

• Staking on cryptocurrency exchanges. Beginners are advised to choose this type of staking, because this process is quite simple. The largest exchanges themselves run their nodes to validate the PoS blockchain, which allows trading platforms to earn income from validation and constantly accumulate coins inside the exchange. The disadvantage of this staking option may be the frequent hacking of cryptocurrency exchanges, as a result of which the user may be left with nothing.
• Staking in wallets. To use this type of staking, you do not need to have a special skill, you only need to replenish the balance of the crypto wallet. By keeping the cryptocurrency on the wallet, the risk of hacking and theft of coins is minimized, unlike crypto exchanges.

Staking vs Mining

The most important difference between staking and mining is the consensus algorithm that is used to validate a transaction. When staking, Proof-of-Stake and its other variations are often used, while mining - Proof-of-Work.

Let’s take a look at other differences between staking and mining:

How much can you earn on staking?

To date, staking remains a fairly popular option for passive earnings, since it does not require any material investments, while it brings a fairly good profit.

It is impossible to name a specific amount that you can get when staking, since all earnings are tied to the choice of a coin, a staking option and the period for which you plan to place the asset. The percentages of earnings from users may differ from each other. Compared to mining, the situation here is more stable, so you will receive 100% of your bonuses.

There are projects where not all participants can receive rewards, but only those who have been selected as validators, but here you already need to own a large amount of money. If there is no such amount, then users often look for like-minded people and unite with them in staking pools in order to become a validator. In the end, the amount earned will be distributed among all users of the pool in the shares that were invested by each of them.

Staking risks

In any field of activity in which finance is involved, there will always be certain risks, staking is no exception to the rule:

1. Volatility of cryptocurrency rates. The lower the rate of the coin you have chosen for staking falls, the less fiat earnings you will receive. It is worth choosing a crypto that shows smooth dynamic growth, then the risk of burnout is very minimal.
2. Account hacks and cyber attacks on the protocol or exchange. To prevent the loss of your assets, you need to securely store your usernames and passwords, as well as better staking on hardware cryptocurrency wallets. Remember! If you receive an email from a validator asking you to send money directly, it's most likely a fraudster, so it's better to ignore such requests right away.
3. Blocking nodes of the validator that stores tokens. This option may also be possible if the nodes do not maintain 100% working time during the transaction.

Conclusion

Every year, cryptocurrency staking is gaining more and more popularity, as it shows a fairly good level of profitability with small risks. In comparison with the banking sector, the staking of some cryptomonets brings more earnings than investing money on deposit in a banking institution.

Receiving passive income from staking attracts more and more investors in this area, and a variety of types make it possible for many users with a variety of initial capitals to become members of the community. Beginners can start with minimal investments and safely place their coins, and for the more confident, you can try DeFi-staking. In any case, do not forget about the possible risks!