What is Staking?

Staking is the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network.

Editor
Editor
Apr 17, 2020 · 4 min read

Most commonly, users are rewarded for simply depositing and holding coins on an exchange, in turn earning a monthly return calculated based on the user’s pro-rata share of the total balance held on the exchange that generated the staking rewards during the given month.

Staking was developed as an alternative to the Proof of Work (PoW) model used by coins such as Bitcoin, where the ever growing energy consumption required for mining presented an issue for network scaling. Proof of Stake (PoS) was proposed as an alternative, energy-efficient means of reaching distributed consensus that would allow for much greater network scaling.

How does staking work?

Binance sums the concept up very well:

“Unlike Proof of Work (PoW) blockchains that rely on mining to verify and validate new blocks, Proof of Stake (PoS) chains produce and validate new blocks through staking. This allows for blocks to be produced without relying on mining hardware (ASICs). So, instead of competing for the next block with heavy computation work, PoS validators are selected based on the number of coins they are committing to stake.”

The validator then stakes the coins in their wallet and creates a new block relative to the amount of coins staked. For example, if the number of coins staked is 2% of the total coins on the network, they can mine 2% of transactions for new blocks.

Staking Opportunities

Many exchanges have already started offering staking, including Binance, Kraken, Coinbase, and CEX. As of January 2020, some current staking opportunities include:

Tezos

ROI: 6%-7% Estimated Annual Yield

Description: Tezos is “a decentralized blockchain that governs itself by establishing a true digital commonwealth and facilitates formal verification, a technique which mathematically proves the correctness of the code governing transactions and boosts the security of the most sensitive or financial weighted smart contracts.

Hold period: 3 weeks

Minimum investment: 1 XTZ

ATOM

ROI: 6%-9% Estimated Annual Yield

Description: Cosmos (ATOM) is a decentralized ecosystem of independent blockchains that its creator, All In Bits Inc (dba Tendermint Inc), hopes is the foundation for the next generation of internet technology. Instead of participating in divisions between crypto factions, Cosmos brings them all together, enabling interoperability, currency exchanges, and an Internet of Blockchains (IoB). Atom (ATOM) is the proprietary staking coin used by the network and also tokenizes transactions.

Hold period: 1 month

Minimum investment: 0.5 Atom

Algorand

ROI: 16%-20% Estimated Annual Yield

Description: Algorand is a high performance blockchain based on next generation technology that implements a Proof of Stake protocol as well as pseudorandom functions.

Hold period: 1 month

Minimum investment: 2 ALGO

ONE

ROI: 8%-10% Estimated Annual Yield

Description: Harmony (ONE) is a decentralized blockchain platform designed as a bridge between scalability and decentralization efforts. Its development went under the motto of “decentralization at scale” with the focus on data sharing and the creation of marketplaces of fungible tokens and non-fungible assets.

Hold period: 1 month

Minimum investment: 175 ONE

Fetch.ai

ROI: 8%-12% Estimated Annual Yield

Description: Fetch.ai is a decentralized connectivity platform that enables devices to connect directly with digital agents delivering autonomous solutions to complex tasks.

Hold period: 1 month

Minimum investment: 25 FET

Staking Benefits for Token Issuers

Staking coins offers several benefits to token issues:

  • Staking increases the utility of the token.
  • Staking incentivizes users to hold a certain amount of tokens and actively use that token (i.e: for trading).
  • Staking puts pressure against price falls. If certain tokens are required to stake, the staked tokens will be out of circulation with every transaction. With the inverse relation between price and velocity, the reduced velocity due to staking prevents the price to fall.
  • In a way, staking replaces token burning. The act of burning tokens reduces the supply of tokens, and assuming that demand is constant or increasing, the price of token will increase, so staking introduces a “temporary burn” concept.

Conclusion

Staking will certainly continue to grow in popularity and engagement. From it’s solution to the PoW scalability issue, to the many benefits it provides to token issuers, we’ll continue to see more projects adopt the PoS model (such as Ethereum with Casper) and more exchanges offer staking services.

If you’re interested in learning more about staking, we recommend checking out the following articles:

DRIVE Insider

Industry insight and the latest from the DRIVE team

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store