By Larry Wright
When initiated, the crypto market was considered a new niche market based on assets that don’t have any physical existence, are quirky and digital-only. All these notes pointed directly at the demise of this market soon enough as this was an idea that is not any better than hundreds of others featuring the development of a market system, but would this market have any investors or interested parties? This was the big question.
Anyway, we all know what happened next; the crypto market became a rapid success, but the process was rather slow and complicated. Either investor didn’t understand the idea of decentralization and a blockchain system to verify the integrity as well as the transactions that are taking place, or they understood it alright but weren’t prepared to let the decentralization take the best of the centralized or fiat finance.
Anyhow, Bitcoin was the first cryptocurrency that set the stage for the crypto market; it was hard enough to get the crypto to sell at $1, but then visionaries and people always on the hunt for new niche markets to invest their money in and found the crypto market. After that, it has been nothing but sunshine and rainbows other than volatility; well, it is a factor that can’t be taken out of the equation when discussing the crypto market.
Different Ways of Getting Profit in the Crypto Market
The crypto market relies on the proof of work which is an algorithm being carried out on blockchain through which the validation of the transactions and successful interpretation of the financial data takes place. There are several ways to turn up a profit in the crypto market; you can either trade various cryptocurrencies, buying them when the prices are down, and selling when the market is high once again.
If it doesn’t favor your temper, then mining of the cryptocurrency is dedicating your computer hardware and processing power for solving the complex algorithms under the condiment of the proof of work taking place on the blockchain systems.
This detail basically entails the provision of your processing power towards decoding complex financial data relating to a certain cryptocurrency and on a specific blockchain and helping it to keep a record other than validating the transactions taking place. There is a third way to work with the crypto market to turn up a profit, which is known as crypto staking; this is somewhere in between crypto mining and trading.
What is Crypto Staking?
Depending on the knowledge you have on cryptocurrency, understanding staking can either be very easy or extremely complicated for you, but from an investment point of view, it is a fine thing and can allow you to make some hefty profit with it without doing much. Do you have the idea of a blockchain system, or how does it work? If yes, then staking is easier for you to understand, and if not, then you first need to understand what blockchain is.
Blockchain is the very platform on which various crypto transactions take place, and since the whole system is decentralized, it needs private validating nodes or people acting as miners to validate the crypto transactions and build the little strands of data known as blocks.
A blockchain in its entirety is the linear formation of the blocks in a chain-like manner containing the data for the transactions that are taking place for certain cryptocurrencies and validating them. Staking is the process of buying a few cryptocurrencies or tokens and then setting them aside to act as an active validating node in the blockchain system for a certain cryptocurrency. Having holding these coins, the buyer becomes an active part of the network’s security and consistency when it comes to validating the transactions taking place in real-time.
This would not be free work if some of you were wondering. Depending on the amount of cryptocurrency a buyer is holding for the sake of staking and the time allocated on holding a compensation is made in terms of money in the buyer’s name by a dedicated crypto blockchain. The money paid to the investor or buyer holding certain cryptocurrencies for a dedicated blockchain is in the form of interest, and its value might continue to change from time to time and also depending on several factors of that of the specific network on which staking is taking place while also including the supply and demand dynamics.
With advancements and the adoption of the PoS (proof of staking) oriented networks, new ways have been crafted to take staking onto the next possible level. There are several alternatives present for you as an investor, and one such is known as group staking. Other alternative names for this are cold staking, staking pools, and staking providers. This enables small-time investors who can only stack a number of cryptocurrencies at a time to make some high turnover on their investment as an enlarged group for staking will reel in more elementary profit.
How does Staking Work?
It is best to know the type of investment you are making and how it will pan out before actually allocating that much money into a relative scheme. The same needs to be done with staking; you need to understand how it works. The first step that you need to take in this regard is to buy a certain number of tokens within the network. You must know that staking can only be done with a blockchain or a networking system supporting the PoS protocol; if it doesn’t, you can’t do staking with that network.
There would be some detailed guidelines by the developers of that particular blockchain as to what to do, how to do it, and all that stuff. Once you have made the purchase, you need to register yourself onto the network for staking following the developers’ detailed procedure. It will only take you a few minutes to be done with setting up your account for staking over a specific wallet, and if you follow the instructions right, only then will you be able to set yourself up for staking.
Many crypto exchanges and blockchain systems have included specific protocols known as staking pools to increase the compensation that the person is going to receive for staking some coins and earning interest. This is done by increasing the number of tokens at a specific time for a specific user, which means they will get a fairly increased share from their earlier investment as it has been increased by the crypto exchange or a specific blockchain for some time.
If the number of staked coins is increased for a specific node, it means that it will handle more and more transactions at a given time, thus increasing the overall take for the buyer. The ranking of the node can also increase the interest that you are going to receive, but for that, there are specific criteria as every node is ranked based on the number of tokens that it is holding.
The nodes that are holding a large number of tokens will surely be getting more compensation in case of the interest earned, so better off will be the buyers residing their crypto tokens in a highly ranked node. This is the very reason why staking pools have become a popular investment vehicle among crypto enthusiasts and the very reason people form groups and nodes holding their tokens inside so everyone can earn a considerable amount of interest in a compound fashion.
There is another type of staking that is lesser-known and is known as the fixed staking, this type of staking means that the user is only going to stake their coins or tokens for a specific time, and after that, they will be liquidating everything. This type of buyer will only be compensated for the time during which he held onto the tokens and staked them for a specific blockchain.
There is even a more flexible staking scheme offered by many crypto exchanges that are known as flexible staking, which means that the users can withdraw their tokens any time they want. But they will still be compensated for the time frame during which their tokens resided within the blockchain and helped to authenticate transactions and such.
The flexible staking doesn’t provide more premium and charming returns, but the rigid staking, on the other hand, does provide you with some solid interest rates and eventually returns on your investment.
What is Proof of Stake?
Proof of stake is a new consensus mechanism in effect that is designed to lower the fees while increasing the efficiency and overall speed of the blockchain systems, which means that the validation of the transactions could come earlier, and more and more transactions could be validated in a given window. The very route that proof of stake takes to decrease the costs is by allocating the validation of the transactions towards the staked cryptocurrencies rather than throwing off these complicated math problems over to the miner’s side, which is an energy-intensive process and thus is costly.
Proof of stake serves the same as crypto mining, in which the latest transactions hitting the blockchain are diverted to the miners or people willing to allocate their processing power towards the agenda of validating these transactions and earning some crypto in exchange. But in the case of the proof of stake algorithm, these transactions are validated literally by the people invested into the crypt validation through the crypto tokens they have bought and are not holding onto these. The implementation of the tokens might vary from user to user or from blockchain to blockchain, but most people buy crypto tokens and then stake them on a specific blockchain for processing new transactions, which end up being a block on the blockchain and the person whose crypto solved the problem is awarded. So, in theory, it is almost the same as crypto mining but in reality, not so much. These staked tokens act as the guarantee for the legitimacy of the new transactions that are being added to the blockchain system.
The network is going to choose the validators based on the cryptocurrency they hold and the time period for which they have held it. So, if you have a large enough share of the cryptocurrencies staked on a specific blockchain and for some length of time too, then naturally, the network is going to prefer you over the other crypto tokens that are staked, and you will get to make some decent money on this.
Benefits and Risks Associated with Staking
Crypto staking has been growing at a steadier pace due to the attractive rewards that are bestowed upon buyers who are willing to buy some coins and then stake them into the system for the sake of validating the transactions taking place. Interest rates are pretty intensive for the crypto staking as the reputed blockchains such as Ethereum and Cardano blockchain is even willing to offer a 6% interest rate on a yearly basis, with the number increasing some more if the investor chooses to become a long term player of the pool staking game.
Some small-scale blockchains are willing to go all the way through and even offer 100% interest rates, such as PancakeSwap and Kava. You can’t say that the interest rates are pretty redundant, and there are not many options for you to choose from as there are one too many blockchains out there offering staking and pretty amazing interest rates too. There is no need to feel all giddy and fizzy inside as there are some associated risks with crypto staking that you need to know about. There are multiple factors out there that can affect the performance of these tokens and the security detail that these provide you with.
The first and foremost risk that you need to consider is the loss of your tokens in a cybersecurity incident that can render all of your crypto tokens and leave you with nothing. Hacking attempts and cybercriminal activity is at the peak with cryptocurrencies and blockchain systems; even if blockchain is the most advanced and secured financial system, it is not fully immune to these things.
To best tackle this threat, you can render the services of cold staking, which involves staking your crypto coins that are placed in a physical hard drive which takes hacking out of the question due to the fact your crypto coins are not available on a network that is prone to hacking or facilitating the entry of cybercriminals. However, your hard drive won’t be connected to the internet, so hacking is out of the question, but damage to the hard drive is another concern you need to do something about.
Another risk that you need to be mindful of is the price dip. Suppose your cryptocurrency’s price decreases while you are staking them; this will definitely have some effect on your overall interest ratio, cutting down most of your profit. Staking is done by locking your crypto coins in, which means that you won’t be able to liquidate them in any way, shape, or form if things take a dark turn. Unlike other basic investors who are able to liquidate their crypto assets when the market is in a tumble to lay off most of the loss, you won’t be able to do that and would have to go with the flow.
The uptime or bandwidth of the node you have staked your coins into is another factor that poses a great risk. If due to some reason the bandwidth of your node is disturbed and it is not working at its optimum or, say, the uptime of the node is disturbed, and it goes offline, then there are going to be penalties. And you will be the one facing them or your coins which you have staked in that specific node which has gone off. The change in validator up time or capacity to carry on the validation process for the transaction’s authentication can dearly affect your profit margin.
Final Thoughts
The proof of stake is a new algorithm and preferably more widely adopted and sought after as compared to the old algorithm still in effect for Bitcoin, known as the proof of work algorithm. It provides investors and people who literally seek markets and the potential ways of investing their money into strategies that are going to earn them handsomely without them having to do much.
Proof of stake is the next big thing after the proof of work, and it is going to remain so as long as people are interested in earning some heavy interest on the investment they have made without having to do much. The very barriers that once existed, making the entry of new individuals into the mining or blockchain industry, are now vanishing, and the existence of the proof of stake system is the very assortment of it.