Lately, the PoS has been in the crypto world’s public attention more than anything else. And as the trend tends to lean towards staking, we can’t help but look for the best coins to stake.
For Blockchain environments, the algorithm securing the network can be a deal maker or a deal breaker. That’s because it shows the earning potential users may have, as well as how secure and performant the network can be.
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?
The definition and terminology might vary from project to project. Yet, generally speaking, 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.
The size of the stake affects a node’s chance 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 the PoS concept 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 as the network needs to check first if a validator has 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
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 13% average early return. (more details here)
So for an ADA equivalent of $1,000, you may get a yearly reward of around $130.
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.
Whitin the Tezos community, staking is quite popular as the staked value represents up to 78% of the market cap.
That comes in the context in a context where the annual reward rate for delegated staking is 7.85%.
So for an XTZ equivalent of $1,000, you may get a yearly reward of around $78.5.
Algorand was founded in 2017 by MIT professor Silvio Micali. He created Algorand after hearing about the famous Blockchain Trilemma concerning scalability, security, and decentralization.
The Algorand blockchain went live in 2019 and enabled smart contracts later that year. As for the consensus mechanism, Algorand functions through Pure Proof-of-Stake, which can support up to 1,000 transactions per second in a secure decentralized manner.
The pure proof-of-stake mechanism employs 2 types of nodes:
- participant nodes – that participate in the consensus mechanism
- relay nodes – that facilitate the communication between participant nodes.
In order to create a block, first, 1,000 participant nodes are chosen to produce a block. Afterward, from the chosen participant nodes, one will be selected to add its block to the Algorand blockchain.
And like in any, PoS system, the chances of being selected are proportional to the number of Algo the participant node has staked.
The relay nodes have to manage the random selection process and store the blockchain data.
Participating in Algo’s consensus mechanism is as simple as it can be. Every address holding at least 1 Algo in a non-custodial wallet is eligible to earn rewards. As for custodians and centralized wallets, it depends on the terms and policies.
The annualized reward for Algorand staking is 5.52%, so, for $1,000 in Algo, you may earn around $55.2.
Polkadot is founded by Dr. Gavin Wood, Robert Habermeier, and Peter Czaban within the Web3 Foundation.
The goal is to build an ecosystem where different projects can build their projects upon and rely on its security instead of building from the ground up.
The network connects blockchains through a system involving a Relay chain, several shards called parachains, and bridges.
As for the governance system, Polkadot employs a referendum-like method called Referenda. The voting system aims to engage a large part of the community by granting DOT holders voting rights based on their stake.
To become a voter, a DOT holder must lock their coins up for at least the enactment delay period beyond the end of the referendum. There is also the possibility to vote without locking, but the vote’s value is drastically reduced.
Polkadot’s consensus system has a staking consensus protocol at the base. But besides becoming a validator with a 24/7 active node, the staking also engages a system of nominators.
The validators are there to validate transactions, and the nominators are there to nominate a validator.
The nominator can attribute his stake to up to 16 validators he trusts and will earn rewards based on their activities.
Polkadot has one of the highest annualized total reward rates, around 13.5%.
Thus, if you stake $1,000 in DOT, you can earn up to $135 a year.
Mina approaches the blockchain world by proposing a unique system of zero-knowledge-cryptography designed to have a constant size of 22 kilobytes.
With the recursive zero-knowledge-proof approach, Mina employs a system of taking snapshots of blockchain transactions history to track the chain’s evolution.
Each new transaction and block becomes part of the same snapshot; thus, the Mina blockchain doesn’t grow in size over 22 kilobytes. It basically is a photo of a set of photos.
The Blockhain arhitecture works through 3 key participants:
- block producers,
The verifiers act like nodes on Bitcoin, holding the 22 kb zero-knowledge proof. The block producers are similar to miners as they create blocks, earning transaction fees and block rewards. However, the block producers only store the current version of the blockchain, sending snapshots to verifiers.
The snarkers are tasked with taking snapshots of the transactions taking place. Block producers pay them for their services.
The proof of stake employed by Mina is partly similar to Cardano’s Ouroboros and has no minimum stake. Also, block producers earn rewards based on how big their stake is in relation to other producers.
The annualized reward rate for Mina staking is around 11.5%. Therefore, you can earn around $115 a year if you decide to stake $1,000 in Mina coins.
How to start staking cryptocurrency
Open up a node
Opening up a node can be a double edge sword. 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);
(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 to.
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 CARDANO(ADA), TEZOS, AlGORAND (ALGO), POLKADOT (DOT), and MINA.
- 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.