When the Bitcoin blockchain went public in January 2009 a few people were introduced to the concept of mining a cryptocurrency. Fast forward: It is the year 2022 and most people already know what mining is and that it requires a lot of resources and is therefore not profitable for most retail investors. Staking on the other hand allows investors to earn a passive income without investing huge sums into hardware or electricity.
What is staking? How does it work and how can you earn income by staking? In this article, we are going to introduce you to the technology and how to get started on LiteBit.
What is Staking?
Staking refers to two different methods of taking part in a blockchains consensus. Mining is the activity associated with the proof of work consensus. Staking on the other hand is associated with proof of stake. As the name already reveals in order to become a staker one must be a stakeholder. In this case, the term stake refers not to a stock, but a cryptocurrency or a token.
Holding a token or coin allows staking. Some blockchains require stakers to hold a specific minimum while others don’t. Stakers usually verify transactions in the network by guaranteeing the validity of the next block with their own stake. The basic idea is that a stakeholder wouldn’t try to manipulate the blockchain because he would otherwise hurt his own investment.
But there are also some blockchains that are opting for more aggressive mechanisms that are working in the background like slashing. Slashing is a technique that allows the network to destroy the stake of a malicious staker.
Please note that unlike proof of work there are many different variants of proof of stake. Here are a few examples:
- Liquid Proof of Stake
- Delegated Proof of Stake
- Leased Proof of Stake
What they all have in common is that it requires holding a stake in order to take part in block production as explained above.
How does staking work?
In order to validate new transactions, a proof of stake blockchain needs to produce new blocks. Block production and validation are done by stakers who are also called validators. In order to prevent the blockchain from becoming rigged the network chooses a random validator.
As explained before, in some cases the validator needs to hold a certain number of coins. For instance, in order to become a validator on Ethereum 2.0 it takes 32 Ether, which is roughly 86.000 Euros at the time of writing.
Once the validator is randomly chosen it checks the block. If it’s correct it gets validated and is often reviewed by a threshold of other validators and then becomes confirmed. In return, the chosen validator receives a block reward like a miner. Unlike with mining, block production and validation become non-competitive with proof of stake. But there are several proof of stake blockchains that add a competitive element by allowing smaller stakeholders to vote for a certain validator. In return, the validator is more likely to get chosen and will reward his voters who are also called validators by sharing the block reward with them in case of success.
Cold staking vs. Hot staking
A validator is usually doing so-called hot staking. This means that the validator not only has to provide a minimum stake but also needs to be connected to the network with his wallet. That being said, there is of course equipment and knowledge required to run a validator.
The second option is called cold staking and is more interesting to retail investors. Cold staking requires delegating your coins or tokens to a certain validator. This doesn’t require sending the coins. Instead, the delegator simply signals to the network that he is supporting a certain validator with his funds.
Cold staking requires not only fewer resources but is also considered more secure. Once the stake is delegated the wallet can be kept offline and the income is received automatically.
The difference between staking and lending
As we already explored staking is a vital part of a network’s block production. Lending on the other hand is something completely different. In the crypto space lending either refers to certain DeFi protocols or lending out coins on centralized exchanges for margin trading.
Lending in decentralized finance usually means that the lender is receiving an interest rate for lending his coins or token that has to be paid by the borrower. Both lending and staking rewards are often calculated with an annual percentage rate. Still, staking is about running the network and receiving a reward in return and lending is about earning an interest rate on a loan. Both offer the option to earn a passive income but have different implications for investment.
Can I stake my coins with LiteBit?
Yes, LiteBit supports staking for several cryptocurrencies. Please check out this page to see which coins are currently supported and which APY they yield.
Is staking safe?
Yes, staking your coins with LiteBit is as safe as keeping them in your LiteBit wallet. If you are looking to stake coins on your own wallet you need to make sure that you understand all the technical details to prevent errors. Other than that staking is considered to be a safe technology.
Do I need to hold a certain number of coins on LiteBit for staking?
No, you can start staking right away with a small investment. There is no need to buy and hold a threshold of coins.
Are staking rewards stable?
That depends on the network and its current workload. Most blockchains have a mechanism that increases the reward when only a few validators are active and decreases it if staking becomes more popular. While fluctuations are possible the reward stays relatively stable over a longer period of time.