What is Staking?
Staking is the process of storing funds on a specially designated cryptocurrency wallet (or exchange) to support operations on the blockchain. In other words, your funds are “frozen,” and for this, you receive passive income in the form of interest. The staking payout or profit depends on the chosen coin. For example, Tezos pays Staking interest income at about 6% per annum, and ALGO pays about 30%.
Staking is the process of holding funds to receive rewards, while contributing to the operations of a blockchain. As such, staking is widely used on networks that adopt the Proof of Stake (PoS) consensus mechanism or one of its variants. Proof of Stake is a method of protection in cryptocurrencies. The probability of a participant forming the next block in the blockchain is proportional to that user’s volume of Staked coins. In other words, the user with the highest balance in the network will likely create the next block in the chain. For example, a participant who owns 1% of the total number of tokens will, on average, generate 1% of new blocks.
For one user, keeping even 1% of the coins can be an overwhelming task, so often users pool together to increase the likelihood of being selected as a validator and receiving rewards for checking the block. Users combine their Stake of coins and share the block reward in proportion to their individual contribution.
To Stake effectively, Become a Member of a Staking Pool.
For example, to become a validator on the Tezos network, you need: a computer with 8GB of RAM, a 100GB SSD, a static IP address, and 10,000 XTZ. Also, you may additionally need a backup Internet channel, an uninterruptible power supply, and Raspberry Pi 3 to work with Tezos-signer. According to rough estimates, the PC hardware will cost $500, and 10,000 XTZ now cost $15,500. With an annual yield of 6%, you will receive a staking reward of 600 XTZ for a year of Staking. As you can see from the calculations, validation, and taking into account PC hardware, Staking will be beneficial only if the XTZ price increases by 3.2%. And this is without taking into account monthly expenses for electricity and the Internet.
In this case, one must invest about $15,500 to Stake. Add to that the complexity of the setup and the need to maintain all equipment. All of this does not contribute to earnings for an inexperienced user. But if the inexperienced user with a small deposit joins in a pool, the task of setting up and maintaining equipment is passed on to the pool administrator. In exchange for this, he charges a percentage of the remuneration for Staking. The balance of the Staking reward gets distributed among the pool participants. Staking pools result in a situation that benefits the users and the pool administrator.
Cryptocurrency exchanges, such as Binance, sometimes act as a pool administrator. Consider Staking on Binance using the example of NEO. NEO promises up to 3% per annum. Buy or deposit NEO tokens to your exchange address and leave them. Now you’re Staking! Not all exchanges support the Staking of all PoS coins or tokens, so be sure to check with your exchange before expecting a Staking reward.
Now your tokens are Staking. Once a month, you will receive approximately 0.25% of the amount of your Stake. Staking rewards show up in your distribution history. Here is what it looks like.
Note that with NEO and ONT, remuneration pays out in GAS and ONG.
Currently, the popularity of Staking is growing. According to the stakingrewards portal, Tezos holders are staking of 74.18% of the total supply, which is approximately $815,000,000. Cosmos has 74.42% or $580,000,000 in staking. The total amount of assets utilizing Staking is close to $10 billion.
For the economy of crypto assets, some coins must be Staked to withdraw supply from circulation temporarily. By temporarily removing Staked coins from circulation (a coin is only staking as long as it remains “locked” in the specially designated wallet), developers and economists expect it should contribute to the growth of the price of the token. That is, by removing 74% of tokens from circulation, we assume that the price will increase by about four times. But theories and reality can sometimes be different.
At the present time, XTZ trades at $1.37 so in order for staking to remain profitable taking into account the annual interest of 6% you would have had to buy XTZ for less than $1.45, a year ago. This means that all who bought and staked XTZ a year ago are in the red. It follows that choosing the right time and price to buy coins for staking purposes is critical.
In other words, the main reason for choosing Staking is your assumption that, in the future, the price of these coins will increase, thus improving your profits through compound interest.