We have launched Cryptogram, an India-focused free weekly newsletter on blockchain tech, global crypto markets, and Web 3.0 technologies which promise to change our future. If you would like to subscribe to this newsletter, click here. You can read our past editions here.
Staking is the process of locking up crypto assets in a target wallet or exchange in return for rewards and crypto passive income. In laymanâ€™s terms, staking is the process of simply holding your crypto assets in a wallet for a fixed duration of time to earn rewards from them. Staking can be done via reputable exchanges, or on wallets as specified by Proof-of-Stake (PoS) blockchains. Giottus customers can now stake Tron (TRX), Polygon (MATIC), Cardano (ADA), Solana (SOL) and can earn passive income on our platform. In todayâ€™s article, we try to explain what is staking in a simpler way.
Bitcoin (BTC) and other decentralized crypto assets enable sending of money digitally without any central authorities or intermediaries. All the crypto assets operate with blockchain technology. Initially, the solution to manage a blockchain was done through a process called mining by which the Proof-of-Work (PoW) consensus mechanism works. Mining is sort of a competition, where powerful computers try to guess the solution to a mathematical question. Whoever finds the solution gets to write the next page of the transactions, also known as blocks into the ledger. In regards to mining, the more powerful computer gets to make more guesses in a second, which thereby increases the chance of winning the contest. As it involves complex mathematics and science, it is highly unlikely that any individual or a group might get monopoly over updating the ledger, which is how decentralization is maintained.
PoS and staking
On the other hand, Proof-of-Stake mechanism works by locking a certain amount of funds on a computer that is connected to a network. This computer is referred to as nodes and the locked funds are known as stake, in technical terms. Once the stake is in place, this puts the node in the contest of which node gets to forge the next block. Stakers forge the block instead of mining them. The winning node is chosen by looking into various factors such as how much amount is being staked, how long the coins have been staked and most importantly randomisation, so that monopoly of forging blocks could be avoided. Whoever wins the contest gets to forge the next block of transactions is rewarded in coins for their contribution to the network.
Each blockchain has a different set of rules, as to how they calculate and distribute the rewards. For instance, in order to become a validator for Ethereum 2.0, 32 ETH needs to be locked up as collateral, which in-turn will yield staking rewards. It is impossible to lock more than 32 ETH on a single node, so setting up multiple nodes with 32 ETH each is the only way to increase the staking rewards.
Looking from a reward perspective, although staking might prove to be lucrative, they also come with their own set of risks. If the validators are not set up correctly, or if it's harmful to the network in any way, this may lead to penalties. This may vary from â€śSlashingâ€ť, a term referred to destroying a portion of the stake reward or even removal altogether from the network in worst case scenarios. The easiest way to stake for the general public is via crypto exchanges, as they allow staking only with a very minimal number of coins which completely eliminates the hassle of running separate validators, which can be cumbersome. Below is a table of general statistics on staking ratios and annual yield provided at Giottus exchange.
* Percentage of eligible tokens that are being staked currently
**All yield percentages (APY) are estimated values only. Actual yields may vary
Staking at Giottus
Another important aspect to notice before starting to stake your valuable crypto tokens is the lock up period. Giottus offers ADA, MATIC and TRX with no lock up period on your principle and Solana with 2 days lock up period. Crypto asset staking offers the owners a way to earn income thatâ€™s separate from just trading the coins. While the income may be a nice perk of holding a coin and seem to be risk-free, itâ€™s important to remember the downsides of owning and trading crypto, ones that potentially vastly outweigh what in many cases are relatively small staking rewards.
Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.