What is Crypto Staking on Bybit? How does it work?

What is Crypto Staking – What is Proof of Stake (PoS)? Learn to differentiate POS and POW.

What is Crypto Staking?

The cryptocurrency world has been through a period of time since the birth of Bitcoin.

At first, everything was associated with Bitcoin due to the invention of the proof-of-work consensus mechanism, but as a few years later, different consensus mechanism protocols were created.

A consensus mechanism is a way to verify entries in a decentralized repository and keep the repository secure.

In the case of cryptocurrencies, the repository is called the blockchain, so the consensus mechanism protects the blockchain.

Proof of Stake is one of the most famous after Proof of Work, a consensus mechanism that allows staking of cryptocurrencies and differs from Proof of Work in several ways, which will be updated in the next few paragraphs.

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What is Proof of Stake?

Unlike Proof-of-Work consensus mechanisms, Proof-of-Stake does not require mining or extensive computing power to run the network.

PoS is designed in such a way that holders of tokens, aka stakers, are able to use their assets to help secure the network, simply by locking them in a dedicated pool in a process called staking (Becker, 2021).

This is thanks to staking pools where participants can stake their tokens.

Once they do, the protocol uses these coins to verify and confirm transactions, which helps improve the overall security of the network.

The protocol selects validators from a pool and then rewards newly minted tokens or tokens for staking.

This means that the more you commit to the protocol as a holder, the more likely you are to be selected for staking rewards.

From a logical point of view, this also makes sense.

The higher the number of tokens staked in any protocol, the more likely it is that the owner will not attempt any malicious activity as it would damage their wealth.

Therefore, the more skins owners have in the game, the higher their chances of being honest, and the higher the crypto staking rewards they should receive (Granahan, 2022).

This means that cryptocurrency staking can be viewed as a savings account.

Depositors (holders) earn some yield/interest on the money they deposit with the bank, as a reward from the bank, the bank uses it as money for other purposes, such as loans.

Crypto staking rewards can then be considered as earned interest (Sandor, 2022).

Obviously, the stake amount is entirely up to the holder’s decision.

While the higher the number of tokens staked, the higher the likelihood of getting more crypto staking rewards, token holders also need to consider locking up the staking period.

These are basically the time periods during which the coins cannot be moved out of the wallet due to being locked.

Therefore, the coin cannot be moved at any time, although still fully owned by the original owner.

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PoS vs PoW

If you want to carefully distinguish between Proof-of-Stake and Proof-of-Work, it may take up more content than just a few paragraphs in an article.

Proof of Work and Proof of Stake are two of the most commonly used consensus mechanism protocols in the cryptocurrency world.

While PoW is associated with mining, which is how transactions are verified and new coins are issued, PoS is a protocol that allows users to stake their coins and receive rewards.

Therefore, both processes provide the power to validate and validate transactions.

PoW requires energy, which many see as a negative, whereas PoS only requires a lock-up period.

However, both consensus mechanisms serve the same purpose, no matter how different they are – and that is to help the blockchain run smoothly.

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How to start staking?

Staking sounds like fun, but don’t know where to start? Here is a very simple guide on what to do.

First, you need to choose the cryptocurrency you want to stake, as there are countless cryptocurrencies that currently offer this service as they run on the Proof-of-Stake protocol.

To name a few, Cardano (ADA), Polkadot (DOT), Solana (SOL), Tezos (XTZ) or Avalanche (AVAX) can all be staked.

Interestingly, Ethereum (ETH) also offers staking rewards in hopes of merging with Ethereum 2.0.

Ethereum is now in a unique state where participants in the network can either mine cryptocurrency or stake it, before switching to proof of stake promised to deliver by the end of 2022.

After you have selected the cryptocurrency to stake and wish to do proper research on it, you need to transfer the coins to a wallet that allows you to join the staking pool.

This could be the wallet of a certain exchange that offers these services, or it could be a different platform that allows staking.

You also need to make sure that you wager the required minimum amount.

For Ethereum, for example, it’s 32 ETH , however, pools that join in smaller amounts can be allowed there.

Next, you need to join a staking pool that allows staking a given cryptocurrency.

It is very important to check the reliability of the staking pool here as it can significantly reduce your potential losses if the pool is closed frequently.

Also, the size of the pool is important because a very small pool may fail more frequently than a large pool.

In this step, you also need to check the fees for the pool as profit sharing.

If their fees are reasonable, usually somewhere between 2-5% is appropriate, but if they charge more than that, it may not be the best pool.

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Is staking cryptocurrency safe?

As already mentioned, there are several aspects and information that everyone needs to check before starting staking. Thorough research and in-depth analysis is important because any form of staking requires an upfront investment, which means everyone should make sure they know where they put their money.

What is the history of cryptocurrency, what rewards does it usually offer to customers, how does it work, and how does the mining pool that users will choose work? Answering all of these questions, and many others, will determine how successful crypto staking is.

In general, staking with any of the largest cryptocurrencies is very reliable. While the Luna debacle showed us that nothing is 100% safe in the crypto world, instances like this are fairly rare, at least for the biggest altcoins.

With smaller coins and tokens, the implosion occurs at an accelerated rate. This means they typically want higher returns to offset higher risk, which should be an immediate red flag.

However, it remains to be stated that the cryptocurrency locked in any contract or in any staking pool still belongs to the owner. They may be locked for a few days, meaning the owner may not be able to sell or move them as soon as they decide to do so, but the ownership is theirs. So unless the protocol goes to zero, whatever happens, the token should have some value to the user, even if the price fluctuates wildly. In this case, the fluctuations are nothing but noise.

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Disadvantages of Collateralized Cryptocurrencies

Still, noise can be a distracting force for many, which can lead to suboptimal decisions.

This is probably the biggest risk of betting on cryptocurrencies.

Once stakers see the price of their cryptocurrency getting lower and lower, they may be tempted to take it out and sell it, which can take days.

While it’s not the best decision, it’s still common so far because fear has the power to influence people’s decisions in the marketplace.

As the Luna/Terra debacle showed, people can never be too sure about their tokens.

But this is a risk common to all altcoins, some even say, Bitcoin itself.

This asset class is still young and there are sure to be many bubbles to burst before it matures.

However, while still a disadvantage of staking, this is more of an industry-wide problem than just a sub-industry of Proof-of-Stake cryptocurrencies.

Other issues suggest that hacking can be very dangerous for stake pools.

While this is true, this also applies to other liquidity pools or different bridges that are more vulnerable to hacking.

There is no doubt that the safety factor will need to improve if investors are to get a good night’s sleep.

Beyond that, investors in these products and services need to make sure they understand what they’re doing.

Research is definitely key as it can help make bad decisions related to choosing which cryptocurrencies will be staked.

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Conclusion

Staking is one of the most interesting parts of the cryptocurrency world.

It definitely has the ability to provide a very simple way to earn passive income, but it needs to be based on solid research and analysis.

If that doesn’t happen, investors will soon be surprised by how ruthless the cryptocurrency world is.

However, if due diligence is appropriate, crypto staking rewards can increase the size of any cryptocurrency trader or holder’s portfolio.

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