What is Staking? 5 things to note when investing in Staking

PoW - Proof of Work and PoS - Proof of Stake seem to have been too popular in the world of digital currencies, these are the two most popular and unique consensus mechanisms in the technology of cryptocurrencies. . In which PoS is considered as the dominant consensus mechanism in the future to replace PoW, which requires high hardware configuration, consumes energy and contains more disadvantages.

Also from PoS - Proof of Stake, we have a new method of cryptocurrency investment after popular forms such as holding (coin storage), trade (exchange transaction) or mining (coin mining). That is Staking. So what is Staking? What are the pros and cons of Staking? How to make profit from Staking?

What is Staking?

Before understanding staking, you need to learn about the PoS - Proof of Stake consensus algorithm first.

PoS is a relatively new consensus algorithm for several digital currencies. This mechanism generates new blocks that are added to the blockchain. These blocks are placed by holders of a certain number of cryptocurrencies to help validate a new transaction on the platform. PoS participants will receive rewards (including block rewards and transaction fees) to motivate their contributions.

Thus, Staking is the storage of a certain number of digital coins in the wallet of a Blockchain project for a specific period of time to receive rewards. The amount of rewards depends on your initial investment, including: Number of coins staked, stake duration.

This is similar to how you deposit savings in a bank account to withdraw interest when it is due. Very easy to understand, isn't it!!

Who is the proponent of the Staking idea?

Sunny King and Scott Nadal were the first to come up with the idea for both Proof of Stake and Staking in 2012. At that time, Peercoin was conceived to work on the hybrid mechanism between PoW and PoS, after which gradually eliminates the role of PoW (Proof of Work). This allows users to mine and support projects in the early stages, without being completely dependent on the PoS system.

Later in 2014, Daniel Larimer developed the Delegated Proof of Stake (DPoS) mechanism and was first used as part of the Bitshares network. Later Larimer also created Steem and EOS applying the DPoS model.

Classification of Staking

Staking is divided into 2 types as follows:

Staking with PoS consensus mechanism: As the concept you know above, you use a certain amount of cryptocurrencies to staking and receive rewards for transaction verification. This form of staking is implemented and directly affects the Blockchain network.

Some projects have staking mechanism such as IOST, WAX, TRX, TomoChain ...

Staking by delegating: You deposit the coin back into the wallet of the project development team (not the private Blockchain) and receive periodic profits. This form of staking is not directly involved in validating transactions or any tasks related to network operations, but it is still called staking. It's no different than a trust investment.

For example, stake KCS (Kucoin Share) on the Kucoin exchange to receive additional KCS rewards. The KCS rewards you receive are from the exchange's profits and not from your participation on the network to create new blocks and verify transactions.

How does staking work?

As mentioned, staking is the process of storing digital currency in order to receive rewards for contributing to activities on the blockchain network. Staking is widely used on networks that adopt the Proof of Stake (PoS) consensus mechanism or one of its variants (such as DPoS).

Unlike Proof of Work (PoW) blockchains that rely on mining to verify and validate new blocks, blockchains using PoS generate and validate new blocks through staking. This allows blocks to be generated independent of mining devices (ASICs). PoS validators are chosen based on the amount of coins they pledge to stake, not competing against each other based on computational workloads like PoW.

Usually, the person who contributes more shares is more likely to be selected as a validator for the next block. While mining (of PoS) requires a significant investment in hardware devices, staking requires investing (and holding) cryptocurrencies in a certain amount and time period. Each PoS blockchain has a representative cryptocurrency for stake contributions.

In addition, the mechanism of generating blocks through staking allows for enhanced network scalability. This is one of the reasons the Ethereum network decided to move from PoW to PoS, during the Ethereum Casper upgrade.

Besides, some chains adopt the Delegated Proof of Staking (DPoS) model. It allows users to announce their support through other participants of the network. In other words, an authorized participant makes decisions on behalf of other users.

Authorized validators (nodes) are those who handle the main operations and overall governance of the blockchain network. They participate in the processes to reach consensus and define key governance parameters.

Benefits of staking coins

The following are some of the benefits for miners with staking.

_The PoS consensus mechanism eliminates the dependence on high-end computing hardware. When a mining node is tied to a wallet, it is guaranteed a fixed percentage of the transactions on the network regardless of its processing power.

_Investors holding a sufficient number of cryptocurrencies can confirm transactions on the network.

_The value of assets staking over PoS does not depreciate over time like ASICs and other mining hardware. This value can only be affected by fluctuations in market prices.

_PoS is a more environmentally friendly and energy efficient form of consensus mechanism than proof of work PoW, which is still used in the Bitcoin network.

_Reduce the threat of 51% attacks in the network.

Among them, the most obvious main benefit of staking is that it eliminates the need to invest in expensive hardware devices. This system offers guaranteed profit and predictable source of income for operators, whereas with proof of work mechanism, the bonus portion is random for top level computing systems .

Staking's Inflation

In some types of Blockchain, the amount from staking is determined as a fixed percentage of inflation. This incentivizes individuals to spend their money (not just keep it – HODL). This process amortizes the operating costs of the network for all token holders.

For example, Stellar distributes weekly inflation to users who are staking their coins through a set of staking. This approach has the benefit that the network can disburse a fixed or controlled interest rate.

As a result, if a user holds 10,000 XLM for a year and specifies an on-chain inflation destination by signing a transaction, they will earn a 100 XLM bonus. That would happen over the course of a year with an equilibrium inflation rate of 1% (ignoring compounding effects).

In addition, the information can be displayed to all network users who are deciding whether to stake or not. This can incentivize new shareholders as they will receive the bonus on a predictable schedule, rather than the chance to receive the bonus from mining a new block that is probabilistic.

Should I invest in Staking or not?

Currently, there are many investment methods to profit from the cryptocurrency market. These include Staking (POS), Mining (POW), Trading and even Lending that still exist. In particular, to invest in Mining (POW), we need to be equipped with very "modern" machinery, which is not necessarily effective. About Trading, this is a method of making profits from "buy low, sell high". But this form is not for everyone. Because, not everyone can trade well and the risk of “sml” is very high. As for Lending, I don't need to mention much. Because in 2017-2018, many brothers had to die because a series of Lending projects were "closed", which means losing money!

After all, about both the pros and cons I mentioned above, Staking is actually still the least risky method that still brings profits to crypto investors.

As an investment, it is impossible to say that there is no risk. Any form of investment must have risks, no matter how small or large. The first risk that I want to talk about is security. If you do not secure carefully, revealing the IP or private key of your wallet, hackers will take advantage of it to steal your assets without your knowledge.

In addition to the security issue, there is also another equally important risk that the coin is depreciated. This is a case of force majeure because it is not possible to withdraw the coin until maturity. When the price increases, we get compound interest, then of course in case the coin price decreases, we will suffer a heavy loss.

Important things to note when investing in Staking

Here are 5 things to consider before making an investment decision.

Rate of inflation

​Calculated based on the ratio of new coins born to the amount of coins in circulation on the market. Cryptocurrency is similar to the traditional financial market, there will always be a number of new cryptocurrencies being born into the market leading to inflation, thereby directly affecting the market price.

Lock time

It is the period where your funds are locked and cannot be moved. This time period is initially selected by you. For example: 1 month, 3 months, or 1 year... After this period, you can get back the amount you have staked (including profit).

Unlock time

Normally you can still stop staking before the allotted time by using the un-stake button. However, you will not be able to get your staked amount back immediately after pressing the “un-stake” button, it will take a certain amount of time.

Sudden unstakes can affect the normal operation of the network, so this rule was put in place as a way to reduce risk and give the system time to process if the number of requests is high. unstake is too big.

Interest rate

It is the profit rate after the Staking period ends. Of course we want the interest to be as big as possible when participating in staking.

Minimum Required Cryptocurrency

To start participating in Staking, you must meet the minimum number of coins required by the project. It varies from project to project.

Weight

The higher this Weight value, the larger the number of cryptocurrencies, and the longer the stake, the greater the possibility of gaining the right to process transactions and create new blocks. That means the higher the reward you get.

How to optimize profit?

Based on the parameters that directly affect Staking above, you can adjust them to maximize the interest rate when staking.

If you only have a small amount of coins, the best option is to participate in staking on existing Nodes or Masternodes to receive rewards from there. By storing coins on a wallet, or on some supported exchanges, this is a very simple way for small investors.

If you own a large amount of cryptocurrency, in addition to the above, the option to get the most profit is to become Nodes or Masternodes with a direct role in processing transactions and creating new blocks. This is the way to get you more rewards but you will need to do some hardware setup and connection (it's not too complicated and only takes about 10 minutes max).

Choose a good Staking project

To choose an effective and safe staking coin, you need to spend time and effort on research. Here are some criteria you need to keep in mind before making a staking decision:

+Where is the main focus of the market?

+Is the development team productive?

+Is the roadmap realistic or not?

+Is liquidity good?

+Coin community

+The payout rate of the coin is also an important factor

Steps to start staking

The basic steps for you to staking and receive profit from the crypto project.

Step 1: Choose a cryptocurrency that allows Staking. Consider the indicators above to choose the coin you want to stake: Interest rate, inflation, price, weight, guaranteed to suit your needs, capital and expected interest rate.

Step 2: Install the wallet or configure the computer

Step 3: Load coin into wallet/computer, or exchange to start Staking

If Staking from cold wallets, you must not move them out of the wallet, otherwise you will not receive the reward.

Step 4: Start earning interest

Summary

Staking is one of the methods by which we can make profits with cryptocurrencies. This form has advantages and disadvantages as I mentioned above. Therefore, if you choose Staking for long-term investment, you need to learn about the project seriously. Of course, this will take a lot of your time and effort!

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