What is cryptocurrency staking?
Cryptocurrency staking is, probably, one of the most beneficial ways token holders can take advantage of the big sums of crypto they are holding. Staking can be held within different purposes like securing the network or raising demand for the ecosystems’ native token, but the common denominator, regardless of stakings’ goal, is the bonuses and rewards the users receive. In this article, we’ll be going through the different angles of the notion of staking, deepen into the stake crypto meaning, and see how it can be beneficial for crypto devotees.
What is crypto staking?
Crypto staking definition refers to three possible processes in crypto.
Firstly, staking in its classic hypostasis can be understood as “locking up” a digital asset to function as a validator in a decentralized crypto network, safeguarding its integrity, security, and sustainability. Staking is often thought of as a less resource-intensive alternative to mining. Stakers (validators) are paid with freshly minted cryptocurrency as an incentive for helping to protect the ecosystem. Staking in this understanding, to put it simply, is the act of securing crypto in order to collect bonuses, and it wouldn’t be wrong to call it the way of making a passive income — in its mechanics, this process can be compared to the loyalty program, as the user receives bonuses for being loyal to the company, which is expressed in holding its tokens for a long-term perspective. Within this case, staking’s purpose is to secure the network and contribute to a more sustainable way of producing the newest coins — you can read more about this in the next chapter. In this case, the user is rewarded for serving a blockchain validator, while tokens are only used to participate in the validation process. At the same time, being a blockchain node takes a lot of your computer resources.
The second possible understanding of staking is yield farming. It’s beneficial for token holders who possess a significant amount of a particular token they aren’t using. In this case, the owner can stake their coins in the DeFi protocol, so that other ecosystem users will be able to choose this particular protocol among the options of the staking pool, borrow it and pay commissions to the owner.
Lastly, the third possible understanding of staking is hold-incentive staking, which suggests lending or staking coins on a platform in return for interest or bonuses. This is the direction Stobox is pursuing while conducting cryptocurrency staking. In this case, all you do is actually stake coins, while being rewarded particularly for holding the given tokens instead of selling them.
Hold-incentive staking can work in two possible patterns.
Option one, which we used to implement in our former staking campaign, is the following: users deposit their tokens to the staking smart contract, for which they are later being rewarded with the same kind of token. The precise amount of a reward depends on how the staking pool is implemented: usually, there is a particular number of tokens apportioned for this process. If there are 1,000,000 tokens allocated for 10 months of staking, then each month, a certain number of token holders will be having 100,000 tokens distributed among them proportionally to how much their original stake was. As a simple example, if there is an only token holder in the whole pool, this person will be acquiring all the 100,000 tokens as a result of staking. The rewards aren’t distributed equally among the stakers, but rather depending on how many tokens they have staked. If, for instance, user A staked 10 tokens while user B staked 30, this means that user A will eventually acquire 25K tokens at the end of the staking event, while user B will enjoy 75K new tokens.
Usually, at the dawn of any staking event, the inventors’ annual percentage yield (APY) goes through the roof, which is absolutely normal until more people join the ecosystem and start staking as well, thus incenting the system to distribute stake net worth accordingly.
While explaining staking, it’s essential to understand that a smart contract is a flexible tool. Therefore, the terms of any given staking can vary depending on the hosting platform and are always custom. The length of staking, just as the rewarding coefficient along with the events’ terms, are variable units.
Option two, which Stobox adopts within current STBU staking, suggests using pools that imply a certain (limited) amount of seats and a particular staking amount (10, 25, 50 and 100 thousand STBU). In order to take a seat, you should make sure to have a required amount of STBU, which you are going to stake. The interest you are going to receive will depend on the pool you choose, which also serves as an instrument of generating the demand for a token. If you wish to withdraw the body earlier than the selected pool expects you to, you’ll have to pay the 5% or 10% penalties. Early exit fees are implemented to incentivize the users to comply with the staking rules instead of withdrawing their tokens at any given moment.
It’s possible to stake tokens of different types. For instance, in February, Stobox conducted STBU staking for the Stobox Utility Token holders on our Cryptocurrency Exchange. Back then, an average general reward of the whole pool would constitute ±400 STBU per hour, and each user’s personal reward would be determined by the proportion of the pool they held.
For the platform to conduct hold-incentive staking, it’s essential to provide certain predictability in the utility tokens price. It is because any unexpected token behavior (like a sudden fall in price) can be bad for the predictability of the platform usage, as the main reason to buy tokens in advance would lie in the hope to be using them after the ecosystem goes live. If the tokens’ price isn’t stable or falls drastically, such an incentive is gone. Staking, thus, is the right instrument to keep the price steady and a great tool to attract potential users.
Summer 2021 has been proving to be unusually positive and fruitful for Stobox: not only have we awarded the devoted community members with share dropping, but also raised the STBU balance of every Stoboxian who participated in a fellow contest. Currently, we are starting a brand new Staking 2.0 Program. The following staking event we are holding has a number of advantages compared to its previous self — you can read more about them in our latest announcement.
The first described process of crypto staking (validator staking) is possible thanks to the algorithm called Proof of Stake (PoS). Let’s see what this is and how this mechanism works.
Proof of Stake
Proof of Stake (PoS) is a consensus algorithm developed as an alternative to Bitcoin’s Proof of Work. The reason PoW needed a drastic improvement would lie in several senses.
First of all, Proof of Work is incredibly energy-consuming, as its task is to issue new coins on the blockchain. All processes considered, one PoW transaction requires roughly as much electricity as a suburban house consumes in one day.
Still, it’s easier to emphasize the progress PoS brought by describing its gains compared to its predecessor.
1) It’s sustainable. Proof of Stake suggests forging (not mining) new coins — it’s rather correct to use this word, as Proof of Stake cryptocurrencies frequently begin by distributing pre-mined coins, or launching with Proof of Work while subsequently transitioning to Proof of Stake. Because of this, it takes way less electricity to produce a reward for the forger: basically, the reward is the transaction commission, so there’s no need in creating any new coins.
2) It’s safe, as any fraudulent activity may threaten the loss of the entire stake, as well as the right to create blocks. A fraudulent node may also lose the right to poll in the future; in addition, the network ensures that the cost of losing a stake always exceeds any potential reward. This strategy ensures that fairly doing your job will be much more profitable than engaging in fraud.
Proof of Stake’s milestone is the pseudo-random selection process. It includes three basic principles for selecting a node that creates the next block: node’s wealth, random block selection (randomization), and staking age. All the mentioned allows a large number of users to create nodes as it is easy and accessible; random block selection makes the PoS network more decentralized so that mining pools are no longer needed.
Why is crypto staking becoming popular?
The possible supertask hold-incentive staking may pursue is to incentivise the ecosystems’ clients to hold tokens in a long-term perspective. The particular projects often need extra time to grow their business, build their platform and implement their solution after they have already issued the tokens. In this case, to interest their audience in purchasing the issued tokens right now rather than accurately before the project is planned to go live, the platforms launch the staking program, which helps maintain the token price until the project has started and the price is maintained by the actual demand.
Considering validating, it’s crucial to remember that Proof of Stake is used by numerous coins, including Tezos, Cosmos, and Cardano, and each one has its own set of rules for calculating and distributing rewards. It’s important to mention that Ethereum is planning to move to the PoS algorithm as well: this solution is going to be implemented in the upcoming project Ethereum 2.0. Up until 2020, this blockchain was only based on PoW; however, in December 2020, a second blockchain called “Beacon chain” was launched that employs Proof of Stake: this is also known as Ethereum 2.0, and it coexists with version 1.0. In the next chapter, we’ll dive deeper into the way it is going to work.
The staking industry appears to have tremendous development potential, with a number of large PoS initiatives anticipated to go live in 2020 and 2021. The earlier-mentioned switch Ethereum is planning on sparks even more excitement regarding this issue.
Current staking rates (the proportion of total coins to stake) vary across the blockchain ecosystem. They reach 80% on the most prominent PoS blockchains, such as Tezos and Cosmos. At the same time, some smaller networks have participation percentages as low as 10% to 20%. It’ll be interesting to see how these rates influence market volumes and returns.
The lending/borrowing market’s characteristics may also have an impact on the staking market’s development. Lending is a different means of earning a “passive” income on cryptocurrencies, and it may be thought of as a replacement for staking. Asset owners must balance the potential profits and dangers of several alternatives when deciding how to distribute their coins. Increasing lending/borrowing market returns may entice more crypto holders to stake and vice versa.
How to stake crypto yourself
First of all, let’s look at how Ethereum’s proof of stake concept functions. To become a validator for Ethereum 2.0, it’s necessary to first secure 32 Ether as collateral, which will earn staking rewards for the forger. Because it’s impossible to lock up more than 32 Ether on a single node, you may simply set up additional nodes with 32 Ether each to boost your payout. This project will be fully deployed in a few years and will merge with Ethereum 1.0. This event, termed “the docking,” will occur around 2022, after which Ethereum will be purely a PoS network. It will only be possible to withdraw the staked Ether and rewards only after the docking has occurred, thus staking is only advantageous for long-term Ethereum holders.
After you make sure the timing for such investments meets your expectations, it comes a time to talk about the financial side of the deal. Just like it is with any other investment, it’s only worth starting staking in crypto staking websites if you have spare money. After the coins are bought, you can freeze them using the specific deposit smart contract. Make sure you have the lead time to keep the coins frozen: staking is a prolonged process — again, just as making a bank deposit is. You should also be prepared for the fact that it usually takes quite a significant financial input. For instance, staking DASH requires 1,000 coins ($225.3K, according to Coingecko as of April 1). It ought to choose cryptocurrencies for staking based on your budget.
Stobox provides a possibility to stake crypto yourself as well, while also doing it the safest way possible. Such a function is available on the Staking 2.0 page.
Stobox Utility Token
STBU powers up our entire Stobox ecosystem of products and services and grants multiple benefits to users
A few risks, which may come along with crypto staking, are scam projects (read more on scam due diligence in our article “8 Crypto Investment Tactics: Get better returns on Bitcoin, XRP, Cardano, Litecoin”) and smart contracts that may be vulnerable in their nature. Smart contracts are the exclusive technology used by decentralized finance initiatives to power their platforms. Blockchain developers with various degrees of competence and experience create, architect, and build these smart contracts. Some teams are big and well-funded, which enables cross-coverage, code review processes, and the hiring of an external auditor. Smaller teams are out there as well: additionally, they may consist of a single developer with not that big of an expertise.
While staking STBU on our platform, you can rely on our in-house team integrity and experience. While developing our platform, we gathered the best individuals passionate about the future of crypto.