When you look at the hash rate and energy consumption in Bitcoin, you can’t help but wonder if there is an alternative to mining. And the answer is yes, with one of those alternatives being staking. It’s hard to decide which are the best coins to stake, though.
The information is quite dispersed, and the subject looks quite intimidating. But, if Elon Musk could launch his spaceship out there, you surely can get started with staking. Plus, staking cryptocurrency is nowhere near as complicated as rocket science.
So, let’s see how you can start staking.
Table of Contents
What is staking in simpler words
Staking is the process within the Proof of Stake algorithm that involves the appointment of a node to validate the next block. Hence, the chosen nodes are called validators.
To become a validator, a node has to deposit a certain amount of coins into the network as a stake. In a way, it is similar to a security deposit. But in reality, it works similarly to a lottery. Everyone that buys a ticket has a chance to win.
However, the size of the stake affects the chances of a node to validate the next block. The bigger the stake, the more chances someone has to be chosen as a validator.
Once chosen, the validator checks if the transactions are valid. If there are no issues, the new block is added to the blockchain. After the block is added, the validator receives the fees associated with the transactions.
When a node wants to stop being a validator, he can simply pull out his coins together with the transaction fees.
What if some lousy party decides to mess with the validation process?
The inventors of PoS thought about that too. If a validator does not do his job correctly, he will lose a part of his stake or even all of it. So, a validator can lose a lot more money than he can gain if he misbehaves.
Moreover, users can’t unlock their stake straight away because the network needs to check if a validator needs to be punished.
Although it seems to be a more efficient system than Proof of Work, Proof of Stake is a less proven method, and there are quite a few concerns with it. One of them is that the whales are at an obvious advantage.
So, different cryptocurrency networks came up with additional protocols and variations of the PoS.
The coin age selection and Delegated Proof of Stake are some of the most known.
In coin age selection, the number of coins being staked is multiplied by the length of time they have been held for. After validating a block, the coin age is reset to zero, and the validator has to wait a certain period before he can be chosen again.
The DPoS system is maintained through an election process that mainly requires holders to vote for delegates. Delegates are responsible for validating new blocks.
The number of delegates may vary from one network to another. Some networks have a fixed number of delegates that can range from 21 up to 101, while others may have an indefinite number. Each cryptocurrency holder in the network gets several votes that he can use himself or delegate their stake to another stakeholder on the network to vote on their behalf.
As blocks are produced every few seconds, delegates that attempt to mess with the blockchain’s integrity or fail to make blocks constantly will lose reputation and be expelled and replaced by another delegate.
Top proof of stake coins
As we just mentioned DPoS, EOS exists on top of the Delegated Proof of Stake consensus algorithm.
EOS is the native cryptocurrency that powers the EOS.IO blockchain. It began as an ERC20 token on the Ethereum blockchain, and then it was migrated to the EOS.IO as a native token.
Nowadays, because of its capabilities and prospects, EOS.IO is also considered to be a blockchain 3.0 project.
The EOS.IO software makes it possible that every 0.5 seconds, a block is produced. It organizes rounds of 21 blocks in which the top 20 nodes produce 20 blocks. The 21st block is produced by a randomly selected producer, also considering votes.
Block producers are elected democratically, but other users can vote them out on any given cycle. Further, producers that haven’t produced a block in the last 24h are removed from voting consideration.
EOS uses a 5% inflation rate to fund transactions and contributions, from which 1% is used to reward its block producers based on the number of blocks produced. However, the rewards do not go only to the 21 active block producers. The active producers get 0.25% per-block rewards proportional to the number of blocks each of them produced. The rest of 0.75% goes to all block producer candidates (including the top 21) also divide up per-vote rewards, proportional to the total number of votes they receive. They can claim their share of the per-vote rewards at most once-per-day. To claim their share, they must qualify for at least 100 tokens/day.
As a paid Block Producer, you can earn between 100 and 800 EOS per day depending on how many votes you can get.
And as for the EOS staking average early return, you can expect a reward of around 1.87%.
Cardano staking involves a proof-of-stake algorithm known as Ouroboros. It divides up time into “epochs” that contain 21,600 slots. Slots are short periods in which a block can be created, and they last around 20 seconds.
These epochs are each led by elected slot leaders who are responsible for creating and confirming blocks. The transactions in the blocks created by slot leaders are then approved by input endorsers, chosen based on stakes. There can be more than one input endorser in each epoch.
The rewards given for participating in the Cardano blockchain are split between three stakeholders: input endorsers, multiparty computation stakeholders, and slot leaders.
Through the Shelly incentivized testnet, Cardano allows non-custodial delegation to pools as well as staking pool creation. And as it seems, staking Cardano comes with a 10-11% average early return. (more details here)
Tezos has a delegated proof-of-stake (DPOS) consensus mechanism, but in Tezos, staking is called “baking”.
The creation of a new block requires one baker and 32 endorsers. The baker is the one that is chosen to create the block and will receive a 16 XTZ reward for completing the task.
The endorsers are the accounts chosen to verify if the block was baked correctly, and for completing the task, each baker gets 2 XTZ.
Whether you want to bake or endorse, you need to set up a baking node. To do that, you will need at least one roll, which consists of 8,000 XTZ minimum stake.
The more XTZ a baker is staking, the more chances he has to create and endorse new blocks. If you do not want to set up a node or don’t own enough tezzies, you can also delegate your XTZ to a baker.
Most Tezos wallets support delegating, so to start earning more tezzies, you only need to transfer your funds in a wallet and delegate to a baker. You can find a list of delegates on mytezosbaker.com.
Furthermore, you can delegate directly through some trusted exchanges, such as Coinbase, KuCoin, or Binance.
For the Tezos staking average early return, you can expect a reward of around 5.57%.
NEO is the native cryptocurrency that powers the smart contract platform with the same name. The coin grants its holders network governance rights, such as voting on potential changes to the network.
NEO itself is a Delegated Byzantine Fault Tolerance system, but it allows a staking form that works more like dividends for holding and staking the NEO token.
The rewards are paid in GAS, the “fuel” for the NEO economy in paying fees for using the network.
The staking return rate is around 1.7% yearly GAS, interest calculated on staking 100 NEO.
ATOM is the native token of the Cosmos hub and serves three purposes:
- As fees as a spam protection mechanism;
- For staking to incentivize node behavior;
- To participate in the Governance of the Cosmos Hub.
The Tendermint consensus mechanism employed by Cosmos uses validators and delegators. Validators choose who will take part in the consensus, and the validators confirm transactions. Also, completing a block requires a majority of two-thirds of validators’ quorum confirming the proposed block.
Staking on Cosmos requires a minimum of 1 ATOM.
For the Atom staking average early return, you can expect a reward of around 9.18%.
How to start staking cryptocurrency
Open up a node
Opening up a node can be a double edge blade. It can be profitable, or it can be a massive waste of time with money locked up.
In most cases, it requires you to set up a dedicated application and lock up some cryptocurrency. However, if you want to set up a node for one of the proof of stake coins, consider the structure of their incentivizing layer.
If nodes are based solely on the stake’s size, your chances of actually getting to create a block are very low. So, a coin age mechanism that prevents the same users from creating blocks consecutively will improve your chances.
Additionally, in systems where you have to be elected and be delegated by other users, branding and marketing your node to build credibility will be essential.
Third parties such as wallets and exchanges
Setting up a node can involve a lot more effort than you would think, and there may even be a money barrier. Even for Ethereum 2.0, it was announced that you could start staking for Ether on a regular laptop, but only if you can stake at least 32 ETH.
A more accessible alternative for staking cryptocurrencies is to go with staking pools. And if you do not trust pools, you can easily do it with more trusted third parties.
Some of these third parties are:
- Wallets (like Crypto.com and Exodus);
- Exchanges (Coinbase, KuCoin, or Binance);
- Delegates (where it is possible).
When it comes to delegating, you should be extra cautious. Try delegating only in non-custodial environments and research the third-party you’re about to delegate.
And, of course, avoid every offer that sounds too good to be true.
- Staking is the process within the Proof of Stake algorithm that involves a node’s appointment to validate the next block.
- If a validator does not do his job correctly, he will lose some or even all of his stake.
- Some of the best coins to stake are EOS, CARDANO(ADA), TEZOS, NEO, and COSMOS (ATOM).
- You can start staking cryptos by opening up a node on your own or depositing your stake in a third-party platform like certain wallets or exchanges.