Recently staking gains great popularity in crypto market, especially among wallet users. Some wallets claim that you can get extra 7–150% token if you choose to stake your token in their wallet. What on earth is staking? In short, staking means token holders stake their own token to nodes to gain additionally-issued token by the token issuers.
Theoretical Basis of Staking
If you ask why staking exists, the answer is clear. Staking is originated from PoS( Proof of Stake) which is the theoretical basis of staking. Let’s have some basic understandings of PoS first. PoS is a consensus system designed for public Blockchain. It is aimed at the economical profit for nodes (node is responsible for maintaining blockchain by verifying transactions and collecting transactions into Blockchain) throughout the Blockchain network. In PoW based public Blockchain, nodes verify transactions and create new block through solving the puzzle then get reward (generally called mining). While in PoS system, things are different. Here is how it works:
Node that hold PoS based token can send a special transaction to lock(stake) the token in deposit. Node vote for the next block in turns and node’s share of deposit determines their weight of voting and the chance of being selected as validator. All validators throughout the network will fulfill creation and verification towards new block. Their deposit will be considered as caution money. If validators verify fraud transaction, his/her deposit will be confiscated or reward will be decreased(slash). Nodes get rewarded by receiving transaction fees and additionally-issued token every year.
The Main Influence of Staking Economy
PoS based token holders’ equity will be affected if they just hold their token due to the additionally-issued token every year. Here comes node hosting service which is provided by professional team for retail investors lacking of time or energy. Retail investors stake their token to node and give some maintenance fee. In return, they make profit through the additionally-issued token and transaction fee.
Another impact we can foresee is that there will be more and more staking products created in the form of traditional financial products and fixed income products.
The Risk of Staking
First, we need to focus on who will provide staking service. Based on PoS system, anyone who has enough token, can issue staking products. Then the problem develops into “who have enough token”. That will be wallet, exchanges, mining pool, community, investment institutions. For general investors, what risks will they bear when they choose to stake?
1. Fluctuation of Token Price. Staking products generally come with a lock-up period. Although staking increases your token amount, your final balance will slump in terms of fiat if token price decreases a lot, especially in bear market.
2. Inflation Rate. Staking award is mainly generated by issuing additional token, which means there is inflation. High inflation rate may cause great depreciation. There will be big possibility that your staking profit cannot hedge your depreciated value.
3. Reliability of Node(or Staking Service Provider). Since we stake our token to certain institutions with a lock-up period, security and reliability becomes our top priority. If the node runs away or get hacked, it’s general investors that afford the loss.
What You Need to Pay Attention to When Staking
1. Don’t pay too much attention to fixed income but ignore the potential risk of token price slumping. Choose a token issued by a solid team. Care about the additional token issue rate, especially rate that ‘s more than 20%.
2. Generally, staking service providers will claim 5%-25% service charge. Do compare providers and choose one with reasonable service fee.
3. Choose a staking service provider with high reputation and long history. Unreliable provider may adjust service charge at their will or won’t distribute your profit.
4. Care about the contribution the provider has made to the project development. The more, the better.
5. Do check your profit regularly. Not only from the provider’s terminal but also through Blockchain explorer.
Wish you all make a big fortune via staking! Cheers!
