Staking Coins: How to Earn Interest on Cryptoassets
As a result of the “Crypto Winter”, which saw cryptoasset prices drop by 75 to 99 percent, many crypto investors have started to turn to staking coins to add returns to their digital asset portfolios.
What is Proof-of-Stake (PoS)?
Staking refers to the process through which a node on a network sets aside a certain number of coins to participate in a process employed within the network. Cryptocurrency networks which support staking typically employ a special type of consensus mechanism called Proof-of-Stake (PoS).
Drastically different from its better-known counterpart Proof-of-Work (PoW), which is utilized in bitcoin and many leading altcoins, PoS does not validate transactions through the energy-intensive and highly competitive mining process typical in PoW. Instead, members of the network are required to lock up a pre-specified number of the network’s native digital asset to secure the blockchain for which they are then rewarded in new tokens.
Within the PoS consensus mechanism, miners are replaced with validators. Validators are nodes that have successfully met the requirements stipulated in the network’s software and are able to authenticate transactions. While putting up tokens as stake is the main requirement for such networks, there are also other stipulations that may affect a node’s ability to qualify to be a validator. These stipulations vary from network to network and are also dependent on the underlying protocol governing the network.
Once a node fulfills the requirements and achieves validator status, it can then bet on which block will be added to the chain, with the locked away tokens acting as the wager. The more the value of the wager, the larger the reward a node is likely to win as the recompense is typically calculated proportionally. Therefore, the bigger the stake, the higher the eventual reward.
Staking in Masternodes
It is important to note that while networks that employ PoS typically require network members to put a stake aside in order to participate as a validator, staking can also happen outside the confines of the PoS consensus algorithm. Masternodes are one such instance.
Masternodes are a special type of node, which as the name suggests, have special responsibilities, requirements, and rewards.
Popularised through the #MasterNodeMeBro campaign, masternodes are network agnostic. Any network and its underlying consensus mechanism can support the creation of masternodes. Masternodes are typically employed within networks to introduce updates. First seen in Dash, there are now over 500 digital assets that support masternodes regardless of their consensus algorithm.
Similarly to staking in PoS, node owners must also set aside a predefined number of tokens to qualify for the masternode designation. As a reward for their participation in a larger context in the network, masternode owners are entitled to a larger portion of block rewards in comparison to regular nodes. They also get to unlock more benefits such as having greater say in the governance of the network.
Why Staking?
Participating in networks that employ PoS is becoming increasingly popular among investors in the cryptocurrency community. Staking coins is considered as a smarter way of HODLing. Within the cryptocurrency community, HODLing is a term that refers to the practice of holding an asset for an extended period to maximize profits in the long-term.
However, as the bear market has shown, this strategy may not always be the most profitable or safe. Staking, on the other hand, allows users to keep their assets stored away safely in a manner that still supports profit-making. While HODLing is a passive action, staking is the opposite as people who participate in this manner are likely to see the value of their tokens increase over time.
While referencing masternodes, the Dash masternode community explains the advantages of staking over HODLing as follows:
“Think of a masternode as a savings account with a minimum deposit of 1,000 DASH. A traditional savings account pays interest, and a masternode pays rewards which are very much like interest. In the case of a masternode, the reward (or interest) comes from performing services for the network. Not from lending. The big difference between a traditional savings account and a masternode is that your initial deposit never leaves your possession.”
Staking, whether through POS cryptocurrencies or through masternodes, provides members of the crypto community with an alternative means to realize profits outside of the sometimes volatile movements witnessed within the market. Additionally, staking nodes typically result in a more knowledgeable and active node operator which is a desirable outcome.
How to Participate
As explained earlier, a number of blockchain networks support staking either in connection to PoS or to setting up masternodes. One of the most popular staking-enabled networks is DASH. While the network does not employ PoS, members can set up masternodes with a minimum of 1000 Dash which at current market rates equals to a hefty $133,621. The return on investment is typically eight percent per annum.
Another popular choice for staking is the privacy-focused digital asset PIVX. Setting up a staked wallet on the network is a simple matter and does not have a limit to how much PIVX tokens one must lock away. However, to maximize profits and benefits, users can also set up masternodes on the PIVX network. These require a minimum of 10,000 tokens and require a computer that is always on as the node must always be connected to the network. According to Masternodes.com, the ROI for running a PIVX masternode is upwards of 13 percent.
Institutional investors looking to participate in the staking industry will be pleased to learn that Coinbase Custody just launched support for Tezos staking. Through Coinbase Custody, institutional investors will have access to the first-ever “full-service, regulated, comprehensively-insured, and 100% offline staking provider in crypto.” Coinbase is also planning on adding support for MakerDAO, another staking-supporting asset.
Lastly, if you would like to participate in the staking sector but find the technical aspects too difficult, a number of firms designed to help users set up staking nodes have sprung up.
Examples include Staked and Figment.
