The Rise of Staking

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At the end of last month, Tezos (XTZ) became the largest staking network, in terms of assets locked in, according to Staking Rewards. The total amount equaled to $1.81 billion. A couple of weeks after Bitcoin’s halving, the network hash rate is trending down and inefficient mining hardware was taken offline. While proof-of-work remains popular with Bitcoin (BTC), interest in proof-of-stake protocols has been picking up speed. As Ethereum prepares to shift to a PoS blockchain, interest in staking crypto is growing. Staking isn’t just a way to earn crypto. Is staking the answer to cryptocurrency’s mining problems?

Coinbase recently announced that customers can stake their Cosmos (ATOM) tokens. The move allows these investors to lock their tokens on the network and collect inflation rewards on their otherwise idle holdings. Coinbase already supports staking with the established players like Tezos, Dash and Decred.

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Most people think that the only way to make huge profits with cryptocurrencies is buying them when prices are low and selling them when they go up.

But over the last year, staking has become more widespread. More and more people have been paying attention, with staking touted as the best way to make passive returns, by just holding crypto. Staking is holding a certain amount of coins to participate in the network and obtain a reward in return. Staking gives an average annual yield of 10-20% depending on the coins.

The total market cap for all Proof of Stake (PoS) coins stands at $15 billion. Much of this is unnoticed by cryptocurrency holders, because exchanges managing staking on their behalf.

Unlike mining and block rewards awarded to miners for solving complex mathematical problem (Proof of Work — PoW), staking is about receiving a reward for locking coins in a dedicated wallet for a required period of time on the network (Proof of Stake — PoS).

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When new blocks are created and added to the blockchain, transactions are verified by someone who has staked some coins. The objective of staking is to increase the security of the network. The more wallets staking, the more secure the network becomes.

In PoS, block validators are chosen from the pool of people holding the coins. The PoS algorithm selects validators based on the number of tokens a given node has staked in their wallet — deposited as collateral in order to compete to add the next block to the chain. A miner can get into the pool by staking a bound wallet with a certain number of coins. Compounding interest allows a single wallet to gain even more coins, at an increased rate year over year.

Proof-of-Stake is not a new concept. Cryptocurrency staking was first introduced in the year 2012 by Sunny King and Scott Nadal in a whitepaper introducing the peer-to-peer cryptocurrency, Peercoin (PPC), as a form of reward for the Proof of Stake Consensus algorithm. Since then, several other cryptocurrencies have implemented the Proof of Stake algorithm, as a method of transaction verification. The largest 10 cryptocurrenceis supporting staking are:

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Later this we summer, Ethereum will join their ranks. The Ethereum development team is working on ETH 2.0, a significant upgrade that involves re-engineering the entire Ethereum platform and launching a new, more scalable version. Moving Ethereum from a Proof-of-Work to a Proof-of-Stake consensus mechanism, is part of the ETH 2.0 implementation.

All blockchains have one thing in common: transactions need to get validated. As mining has become complicated and commercialized, the days of easy profits have long gone.

Staking is becoming  the primary form of passive income, and also lets users become more active within a community. The popularity of staking suggests that long-term hodlers can earn guaranteed low-risk returns on their portfolios. But stakers are faced with some tough choices. Locking up tokens for an extended period of time, increases the risk of financial loss. Staked coins cannot be sold or transferred until the estimated time of storage has elapsed. It’s possible to be up in the absolute number of tokens but down in value, depending on the coin you’re holding.

Staking lowers the barriers of entry into the crypto ecosystem and gives users more options to financially participate in the consensus and governance of blockchains. Also, traders that want to take a break from the joys of volatility, can use staking and make money, regardless of the market being up, down or sideways.

Ilias Louis Hatzis is the Founder at Mercato Blockchain AG and a weekly columnist at DailyFintech.com.

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