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In blockchain and cryptocurrency, Proof of Stake (PoS) is a consensus mechanism to validate transactions. It came into being to solve the problems with the Proof of Work (PoW) consensus mechanism, including high energy consumption.
Unlike PoW, in PoS, the users don’t need to use electricity or computing power to prove their right to record the next block and win this contest. They rather need to stake their cryptocurrencies, i.e., the cryptocurrency owners can stake their coins to gain the right to check new blocks of transactions and add them to the blockchain.
Simply put, in PoS systems, blocks are ‘forged’, not mined, and for the users to participate in this forging process, they need to lock a certain coin into the network as the stake.
As a result of successful block forging, the user gets rewarded with more of the coin they staked. The more cryptocurrencies are staked, the more transactions are processed, and more blocks are created.
Proof of Stake is literally the "proof" of the number of cryptocurrencies the users have "staked", which entitles them to earn staking rewards. Let’s get into details and see how staking works in practice.
Read more: Read more: What Is Crypto Liquid Staking? Which Coin Has The Highest Reward?
In simple terms, staking means holding certain cryptocurrencies for a set period to earn rewards. These rewards are to incentivise the users to participate in blockchain activities or support them.
The amount of the reward depends on some factors, including
The best thing about staking is that it puts your cryptocurrency to work, which results in earning passive income without selling the cryptocurrencies. Learn all about Staking: Become Hero from Zero. Staking has three general types, which we’ll scrutinise below.
The three main types of staking that we’ll elaborate on below include
Hard (or Validator) Staking imposes fixed lockup periods in which the staker cannot withdraw their tokens or sell them until the period is over. Lockup periods vary from 30 to 120 days.
Although you cannot access your asset for a specific time in hard staking, you usually get higher rewards, i.e., the longer the lockup period, the higher the staking reward. Hard staking can be ideal for those crypto investors who can wait longer and need more rewards.
In Proof of Stake systems, the token holders can stake their assets to help the blockchain by verifying the transactions. When the tokens are staked, their owners cannot transact, trade, or use them as collateral as the assets become illiquid.
Liquid staking came into being to solve this illiquidity problem and provide a different option for those who need to access their tokens anytime. In the liquid or soft staking, the staker can redeem the tokens whenever they wish, which means lower staking rewards.
This method is better for those who may need their tokens in a short time, but it also gains some rewards for the holder in this short period.
In soft staking, the staker receives a receipt representing the staked tokens, which can be traded or used as collateral instead of the tokens themselves. That’s why the soft stakers can withdraw anytime and gain staking rewards.
Cold staking is no different from hard or soft staking, but as its name suggests, the staking process happens using a hardware wallet, i.e., the tokens are staked offline. Learn all about blockchain wallets as means of holding cryptocurrencies.
Whenever the offline staking process starts and a block is added to the blockchain, the rewards are sent to you. Any time the tokens are removed from the hardware wallet, the reward flow will automatically stop.
Now that we’ve learned about different types of staking and their pros and cons, it’s time to find the best type.
So far, we have learned about different types of staking, and now we need to decide which one is better. You need to weigh your options, consult a financial advisor, and consider the time you want to spend and the possible reward you wish to gain.
The following table summarises their main features and helps you make the best decision depending on your financial situation and preferences. After choosing the best type of staking, it’s time to find the best coins to stake, which we’ll dive into in the following section below.
Currently, Polkadot, Polygon, Algorand, Chainlink, and The Graph are among the best coins to stake. However, there are various categories based on which we can choose the best coins, stablecoin, and DeFi coins to stake, including market cap, staking market cap, staking rewards, etc. We’ve put together different factors and have chosen the best coins to stake in 2023 with the highest staking rewards.
Staking is an effortless and profitable way of making passive income. However, there are many factors you need to take into account before making any investment decisions, especially in the volatile crypto market.
As we saw here, staking has different forms, and each comes with specific advantages and disadvantages. It’s not a matter of good and bad, but proper. You need to choose the strategies best fit your situation and priorities.
Thanks to sources like Cryptologist, their screening tools, and analytical articles, you can weigh your options before choosing a project.
After learning about the concept of staking, you may have some questions. We’ll cover the most frequently asked questions about staking below.
Staking is meant to be a way to make money passively, but it’s not risk-free. The common volatility in the crypto market can result in loss. When you lock up your assets for a fixed period, you may lose some of your staked coins as a penalty if the system doesn't work as expected.
Yes, you can get rich by staking as it is a profitable and rather easy way to make passive income, as some staking rewards let you earn even over 20% annually.
Yes, staking can be your only source of income. But, the number of your earnings will depend upon various elements, including initial investment, portfolio, volatility, and cost of living in your area.
We can’t say staking is safer than farming as both include some risks but what makes staking an ideal strategy is a lower initial investment than yield farming.
Staking tax mainly depends on where you live. The IRS has yet to issue specific guidelines for staking taxes. However, many tax experts believe that staking rewards will be taxed as other incomes.
Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation, or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation, and legal advice.
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