Cryptocurrency staking is the trending operation in the crypto world. Putting it into practice means being at the forefront of financial investments. It is being carried out by more and more investors, especially younger ones, who obtain passive income without depending on a bank and operate exclusively in the digital universe.
In today’s post, we will learn more about this operation, its risks and returns, so that you have the necessary tools to decide whether or not you want to include it in your financial life.
Everything you need to know about staking.
The two largest cryptocurrencies by market value in the world are Bitcoin and Ethereum (Ether, actually). Both use a mining system known as Proof of Work (PoW, or proof of work), although the second is on the way to transform it to the promising Proof of Stake (PoS, or proof of participation), supposedly more friendly to the environment.
In the PoW system, miners responsible for validating transactions and issuing new tokens are forced to rely on expensive computers tasked with solving complex mathematical equations. Those who achieve it first, earn the right to validate transactions and receive rewards in cryptocurrencies.
In the Pos system, used by most of the alternative cryptocurrencies or altcoins, the right to verify transactions (which is accompanied by its consequent reward) is carried out through a kind of lottery among those potential validators who have holdings of the same cryptocurrency in their purses.
The higher the cryptocurrency holding of a validator, the more chances they have to get the right to validate and the reward. This is an incentive for these agents to want to have larger possessions, which leads them to rent cryptocurrencies to increase their chances of being chosen.
This is where the long-term crypto investors (holders) appear, who lend them their cryptocurrencies for a certain time in exchange for a percentage of the return obtained by the validators. That profitability translates into an interest rate, which in the crypto ecosystem is known as APY, Annual Percentage Yield.
The interesting thing is that this operation, in addition to being carried out with traditional and highly volatile cryptocurrencies, can also be carried out with stablecoins (stable currencies whose price follows the dollar), which makes it a kind of fixed term.
The truth is that there are several different staking modalities. The most popular are those that are made through an exchange or directly in DeFi protocols (Decentralized Finance).
Let’s see its main features and differences.
Staking on Exchanges.
Attentive to business opportunities, cryptoactive exchanges (both local and international) began to offer their clients the staking service at rates that, even discounting commissions, are very competitive.
The gap can also be explained by the different protocols or staking pools chosen by exchanges to delegate placement. It allows having a reference when making placements in a local or international exchange. On exchanges, staking rates are usually quite stable.
Direct staking in DeFi protocols.
An option for crypto investors with a little more experience is to “bypass” the exchanges and perform the staking by interacting directly with the smart contracts of the DeFi protocols or from the same native wallets, as is the case of the Solana or Elrond blockchain. There is also the possibility of staking directly from a Hardware Wallet (physical cryptoactive wallet), which considerably reduces the risk of loss or hacking.
With direct staking, the crypto investor accesses higher returns than in exchanges, although he must face risks derived from the self-cost of holdings. Self-custody, however, gives you greater freedom and autonomy when making placements and transfers.
It may seem complicated but the truth is that operating autonomously is much simpler than you think. It is just a matter of experimenting with very little capital through a DeFi blockchain that has low transaction costs (for example, Binance Smart Chain or the aforementioned Solana) to become familiar with the placement and redemption circuit.
Of course, it should be taken into account that the APY (Annual Percentage Yield) in DeFi protocols usually varies a lot and even does so intraday. Most likely, however, the crypto investor who chooses to keep their holdings invested for at least a month will end up positively surprised by the returns obtained.
Today, with more than 120,000 million dollars invested in different protocols, the DeFi crypto market is growing by leaps and bounds and the traditional financial system knows it. For this reason, it is estimated that the bank itself will gradually incorporate staking operations into its services with the aim of retaining customers and offering better investment options.
Difference between Masternodes and Stake?
Masternodes and Staking, although usually implemented together, are actually completely separate consensus mechanisms. Just like Scrypt mining in Litecoin it is different than SHA 256 mining in Bitcoin. They both achieve a distributed consensus by blocking “participation”, which acts as a guarantee that they will not attack the network and earn rewards for verifying transactions. So while that’s the same thing, their functions are still significantly different.
What is Proof of Delivery (PoSe) – Masternodes?
Many people in the crypto world tend to think that masternode and staking are the same and they are not the same. Although, the work they both do is somewhat similar, the one thing they have in common is that they are both a way of earning passive income.
Masternodes were first introduced by Dash. What he does is add another security system to protect the network. Mainly because PoS has the need to slightly compromise security to solve the problems encountered when using PoW. Unlike PoW and PoS, Masternodes are more like a plugin, they cannot stand on their own. Simply because it was not made to create and support a new block by itself. Masternodes are unable to create new blocks, but are capable of verifying transactions. This is the main difference between the 2 to keep in mind.
Masternodes are unable to create new blocks, but are capable of verifying transactions. Which is why it is still categorized as a consensus algorithm. Due to its focus on protecting the network, it has the power to reject blocks that could harm the network.
Clearly, masternodes offer many more services than just providing security. So it was categorized as Proof of Delivery or Commitment and thus shows how different the bet is. Maintaining Masternodes also brings with it the power to host and maintain an entire blockchain. These new additional services unlock more privileges and features like;
- Governance and voting rights.
- Instant transactions (InstantSend).
- Private transactions (PrivateSend).
How does Proof of Delivery (PoSe) – Masternodes work?
Users who have their coins in a Masternode, get a 45% share of the block reward. The other 45% goes to users who hold coins on a network that is shared together with a Masternode and PoW miners i.e. DASH, or PoS gamblers i.e. PIVX, or with PoW and PoS i.e. LuxCoin. . 10% of the block reward goes to the blockchain treasury fund. The voting right you have is for the 10% fund allocation managed by the operators.
Unlike PoS, in PoSe – Masternode, there is a substantial amount needed to run a full node/masternode. Let’s use DASH as an example. To have a masternode running, you would need 1000 DASH coins, which is a whopping $68,000.00 USD at the moment.
In addition to this, simply having the money ready for the required amount will not be enough for the masternode to work. Other conditions must also be met, such as if the coin moves from its stake position, it can cause a masternode to stop working. It also has to work online all the time, which requires a VPS (Virtual Private Server) **note: not VPN, but a server.
Proof of Stake + Masternodes
Due to their similar nature and complementary features, Proof of Stake and Masternodes are often combined to create a strong consensus mechanism with some governance included. Each user can stake, securing the network and producing blocks. But those who are heavily invested and lock up a significant amount of coins are rewarded with masternode rewards and usually some governance vote weight. In the future, it is very likely that we will see many more forks of consensus structures of the PIVX type (private currency that was born as a fork of DASH) with POS minging + Masternodes.
Staking and masternodes are similar but different. Both are blockchain technologies where blockchains create secure ledgers on the internet. All consensus mechanisms have rewards that they distribute to those who secure the networks.
Proof of Stake (POS) is an energy efficient alternative to Proof of Work (POW). Proof of Stake works through incentives and collateral “staking” rather than burning electricity to secure the network.
Gambling on POS systems is a good form of passive income as little is required to earn gambling rewards. Proof of Service POSe, often referred to as masternodes, is a control and verification mechanism that is usually combined with POS or POW. Masternoes require a significant amount of participation in exchange for additional voting and verification rights. Masternodes receive an additional reward for providing this service. POSe often requires additional resources and setup on a VPS.