staking and proof of stake

What is the Staking and the Proof of Stake?

In a few words, the practice of "Staking" (or holding) in the world of cryptocurrencies refers to the fact of "buy and hold" a certain amount of crypto-currencies in our e-wallets with the purpose of obtaining advantages and benefits beyond the revaluation of the assets held.
staking and proof of stake

Different purposes for Staking

The reasons for staking today, given the greater complexity of the crypto ecosystems and operations that can occur in this market, can be very varied beyond simply “Buy and Hold” which is long-term position waiting for future value increases.

There are more and more blockchains and crypto ecosystems where staking can be done, depositing there the crypto funds to get incentives and remunerations beyond their own revaluations. And this is where the Proof of Stake (PoS) comes in, a consensus protocol that differs from the Proof of Work (PoW) typical for Bitcoin Mining (see the article on BTC mining). Through this PoS, anyone can participate to decide about each crypto ecosystem future by proving the deposits made and receiving therefore a compensation for it.

proof of stake

Definition of the "Proof of Stake” - (PoS)

It is the protocol or consensus by which new cryptocurrency units can be generated from deposits made in a given ecosystem or blockchain, so that this new issue is based on them, assigning these new monetary units to the depositors who make the Staking and also receiving voting rights to participate in the process of updating and improving the system.

In short, the Staking is a holding of cryptoassets with the aim of participating in the decision making process about updates or improvements of a given blockchain or ecosystem and receiving incentives and remuneration in proportion to the deposits made and using the new issuances of native tokens within the ecosystem

How does the staking process works?

The staking process is not as complex as it may seem and is based on the following steps:

  • Registering on the platform where the staking is going to take place which belongs to a given blockchain.
  • Deposit of the cryptocurrency that works as a store of value in the system and that can be any of the cryptocurrencies more consolidated in the market such as BTC, ETH, LTC, BCH etc.
  • These funds are blocked and a certain amount of the native token of that blockchain is issued using the Proof of Stake (PoS) procedure. Normally these tokens are Etherium based (ERC20 - see article on Etherium blockchain).
  • Next the user has already voting rights, and when they are carried out, further incentives can be derived in the form of more tokens allocated to the participant.
  • These tokens can be exchanged for other tokens and therefore the user can trade with them exchanging other tokens for additional returns or they can be included in a virtual loan system with other users in exchange for added returns.
  • The DeFi or Decentralised Finance (see article on the DeFi), as usual, is based on this PoS consensus which is a system that secures and consolidates deposited cryptocurrencies and creates a participatory crypto economy to generate great progress in the system.

Basic Staking Modalities

There are many ways of doing staking apart from simply "Buy & Hold" waiting for a long-term price increases.

There are two more advanced ways of staking:

1st ) By depositing crypto funds in temporarily blocked accounts within the DeFi protocols, in exchange for representative tokens that can be moved within the system to achieve greater incentives.

2nd ) By depositing crypto funds in a crypto communitary investment fund together with other depositors forming what has been called "Pools de Staking" to achieve synergies and greater incentives as block validators in blockchains with PoS consensus.

staking wallet

In both cases, the deposits (in different cryptocurrencies that function as store of value) are blocked in cold crypto wallets until they are redeemed to be released and taken out of the system.

Therefore, we have two environments where staking is done, on one hand within blockchain projects with PoS consensus such as Tezos, Tron and Dash among others, and on the other hand within DeFis such as Maker DAO, Synthetix (SNX) and Kyber Network (KNC) to mention the most representative ones

Staking Market Size

According to Stakingrewards, a firm specialised in the staking submarket, this one represents approximately 8% of the entire crypto market.

Since the application of the PoS consensus protocol, the Staking has achieved an average yield of almost 13%, representing one of the safest, most profitable and, of course, most ecological mining modalities, as a large energy consumption does take place, unlike in the case of BTC and other protocols .

There is a ranking or listing of projects that are at the top of the staking market, which is headed by Tezos (XTZ), Cosmos (Atom), Cardano (ADA) and Synthetix (SNX), as it can be seen in the table below designed by Stakingrewards.

staking values
Source: stakingrewards

In total, there are approximately more than $11 billion of crypto funds blocked in Staking mode in the different staking or DeFi projects.

Tezos (See article on Tezos), is leading as the project with the highest growth by far in this sub-industry as it has increased its volume by 300% since May last year.

Respecting the DeFis, it has in staking about 2 billion dollars, representing 1% of the total crypto market and 10% of the total staking sub-market.

In short, staking can become an interesting opportunity to obtain passive income by depositing cryptoassets that work as a store of value. There are numerous staking platforms that offer reliable services within the Staking and DeFi Ecosystem submarket, which undoubtedly represent developments that show possibilities worth considering.