Staking in a Nutshell for Beginners

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Staking in a Nutshell

What is Staking?

Staking is the process of holding funds to support the operations of a blockchain network through a reward-driven process. There is more than one differentiating feature offered in crypto-industry and staking is one of them. In short, staking simply stands for holding a cryptocurrency in a wallet for a fixed period, then earning rewards on it. The reward earned from staking varies depending on the length of time you hold it. 

The overall objective of staking is to provide security to the network of transactions. The more wallets staking, the more secure the network is. The reward associated with verifying a transaction is intended to work as remuneration for works completed. Thus the network now has an inherent ‘economic value’ due to the possibility of earning more of the underlying asset. 

How does it work?

In contrast to just holding coins in your wallet or locking them in a smart contract (masternodes), some coins added randomness to the process of staking and voting so that bad players have a hard time manipulating outcomes.

In Proof of Staking protocol, miners are chosen randomly from a pool by holders of the digital coin. You can become a part of the pool by staking a certain amount of coins that are prescribed by their terms and conditions.

Staking systems can also allow delegation in which each individual delegate their voting rights and earned income to a trusted party. Those delegates then earn all the rewards for block validation and pay their loyal supporters some form of dividends in return for their vote.

The advantages of staking

One of the major advantages of staking is that it removes the need for continuously purchasing expensive hardware and consuming energy.

The system also offers guaranteed returns and a predictable source of income, unlike the proof-of-work system where coins are rewarded through a random process with low probability. 

Lastly, the value of your staked coins doesn’t depreciate unlike with ASIC’s and other mining hardware, but can only be affected by fluctuations in the current market prices. This makes proof of stake coins more environmentally friendly and more energy-efficient than mining based coins.

The risk of staking

As staking has become a new trend in the crypto industry, it’s important to mention some risks associated with cryptocurrency staking. 

Staking coins in a bound wallet has one drawback: The risk of weakened liquidity. POS projects basically have a lock-up period ranging from 20 days to a few months. Even if you redeem the tokens, you will not be able to trade during the lock-up period, and you may face big fluctuations in the token price. If you are unable to participate in the transaction in time, you will incur opportunity costs.

This may not be a problem when the value of the token rises, but it can lead to losses when the price falls. The amount earned through the pledge may not be sufficient to cover the price devaluation during the bear market.

Top coins to stake

Here are some of the Top Proof of Stake cryptocurrency in the cryptocurrency market.

DASH is a popular cryptocurrency known as digital cash. It is one of the pioneer cryptos to implement a proof of stake consensus mechanism.
Dash is a unique crypto built upon Bitcoin’s core with additional privacy and quick transaction features such as PrivateSend and InstantSend. It advocates itself as peer-to-peer decentralized electronic cash and intends to be as liquid as real cash which we use in our respective countries like USD/GBP/EUR/INR or CNY.

ZCoin is a cryptocurrency that focuses on privatize transactions, making transaction history untraceable. With the implementation of zero-knowledge proof via a Sigma Protocol, which is an improvement from the Zerocoin Protocol, ZCoin provides users with total privacy. ZCoin project creates a privacy coin that supports freedom of commerce. Honest Mining is supporting ZCoin, whose goal is to be a free digital currency with total anonymity to protect the users.

PIVX stands for Private Instant Verified Transactions is also one of the important proof of stake virtual currency. The currency is mainly focused on the security of its users and their privacy during transactions. The main features of PIVX are their security and high privacy transaction, cheap, fast, and a self-governed system.

Harmony made a breakthrough in six aspects. First, it is fully scalable, which shards network communication, transaction validation and also the blockchain state. Second, it implements secure sharding, which implemented DRG (Distributed Randomness Generation) that makes the process unpredictable, unbiaseable, verifiable and scalable. Third, it offers efficient and fast consensus, since it is based on PoS, not PoW. Fourth, it is based on Adaptive-Thresholded PoS, where the threshold of stakes for a node to join the network is adjusted to the volume of total staking so there will be no single-shard takeover attack. Fifth, it has scalable networking infrastructure that can multiply blocks fast across the network in the form of shards using the Adaptive Information Dispersal Algorithm. Last but not least, Harmony promises consistent cross-shard transactions, where shards can directly communicate with each other.

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Happy Staking!

 

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