What is staking?

The process of tying cryptocurrency to a target wallet for a certain period of time in order to create any reward or unearned income is called staking. These fixed funds support the security and maintenance of a particular blockchain. It can be viewed as a process similar to Bitcoin mining, but requires fewer resources. While Bitcoin relies on Proof of Work (PoW) as its consensus device, other popular coins such as Cardano (ADA), NEO (NEO) and Ontology (ONT) use a Proof of Stake (PoS) mechanism.

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Proof of Work (PoW) vs Proof of Stake (PoS)

How Proof of Work (PoW) works

Let’s review it first. Bitcoin’s proof-of-work system is where miners solve a math puzzle to create multi-blocks of transactions and add them to the blockchain. Since cryptographic problems are quite difficult to solve, miners must use specialized hardware capable of performing the appropriate computations. Because this process is too expensive, it can deter malicious attack attempts. It is more cost-effective and rewarding to participate as a legitimate miner. Each time a miner successfully solves a puzzle and adds a new block, the system will reward them with a certain amount of Bitcoin. A solution, or ‘proof of work’, is shared and verified by other miners as they add identical blocks to a copy of the distributed ledger.

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How Proof of Stake (PoS) works

The PoS model is an alternative created to counter the enormous resources and costs of PoW. Instead of protecting networks that rely on heavy arbitrariness requiring complex calculations, this option only requires participants to store and deposit a portion of their funds. I’m going to point out one thing here. Both modelsface the same problem of verifying transactions before adding them to the blockchain. In Bitcoin, this is done by miners, and in PoS encryption, by validators. Given the colossal resources and costs, miners would not dare to engage in malicious actions. It’s easier to earn money with legitimate mining rewards. Similarly, validators who use their roles inappropriately risk losing some of their staked funds. Staking coins inherently serve as collateral against malicious actions. On the other hand, validators who follow the rules and honestly verify blocks are rewarded. The system randomly assigns ablock to one of the validators whenever it needs validationThe probability of being selected depends on how much the validator has staked. The more funds are deposited, the more the probability of being selectedThis will increase. In other words, just as miners with more computing power are more likely to solve a block’s mathematical puzzle, validators who stake more coins are more likely to be empowered to validate blocks and receive rewards. The rules and conditions for validators are different for each PoS blockchain. Each project has different preferences in terms of technical requirements, minimum stake amount, deposit period, selection method and compensation calculation formula. Nevertheless, they all share the same advantages over PoW systems. Because PoS does not require huge amounts of energy or special hardware, the mechanism is much more scalable. In fact, the Ethereum network is currently in the process of migrating from PoW to PoS with an ETH 2.0 upgrade.

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What is Delegated Proof of Stake (DPoS)?

Delegated Proof of Stake is a popular variant of the mechanism for converting stakes into votes. Instead of having users holding staked coins become validators at the same time, that user chooses a delegate to perform the necessary services. The more money you bet, the more votes you have. The staking rewards are given to the proxy, who distributes them to the electors. This model allows a small number of validators to represent a large number of participants, resulting in improved efficiency, lower barriers to entry for electors, and reduced power consumption or improved sustainability. However, there are also some notable drawbacks: the network has to rely on a small group of validators, which means more centralization. Another potential problem is that users with very small stakes may consider their votes pointless and completely exclude their active participation. Nevertheless, many prominent projects such as EOS (EOS), Tezos (XTZ) and Tron (TRX) have adopted the protocol and have a promising future.

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How to make money by staking?

For potential users or investors, staking is a great option for generating unearned crypto income. It is similar to depositing money in a bank and earning interest.

Staking vs mining

Unlike mining, staking requires minimal technical knowledge and setup. The first step begins by choosing one of the numerous proof-of-stake coins.

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Top PoS Coins

The PoS coins available at Phemex are as follows.

  • Cardano (ADA)
  • NEO (NEO)
  • Ontology (ONT)
  • EOS (EOS)
  • Tron (TRX)
  • Tezos (XTZ)

Now, let me explain the staking process using one of the popular coins for staking as an example.

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1. Tezos (Tezos, XTZ) Staking

As mentioned several times in this post, in order to staking, you must have cryptocurrency in a specific wallet to receive rewards. One such wallet is the ledger.

  1. Before you begin, you need to have a ledger device and have the Ledger Live app installed on your computer or phone.
  2. Install the Tezos app on your ledger via Ledger Live Manager.
  3. Follow the app guide to add your Tezos account.
  4. Buy XTZ on popular exchanges like Phemex and transfer it to the ledger.
  5. Click the “ Receive Reward ” button on the account page of the ledger app and follow the procedure ( delegation; select validator; confirm).
  6. It’s all over.The current Tezos annual profit rate through the ledger is 6% expressed in cash. Of course, your final return will depend on how much you stake.

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What is a staking pool?

A staking pool is formed when coin holders pool their resources in one place. Staking as a unit is highly likely to be selected as a validator and rewarded. When rewards are received, they are distributed according to each participant’s contribution. Since constructing and maintaining a pool requires significant resources, participants must pay a portion of their stake in staking rewards as a fee to the pool provider. The reason pools join despite these additional costs is because of the flexibility that comes with it. Staking requires complying with the project’s fairly high minimum deposit period and balance, which may not be easy for you personally. Staking pools, on the other hand, generally have no withdrawal time limit and can participate for a much smaller amount.

Not only does Proof of Stake require fewer resources and more scalability than Proof of Work, but it also encourages greater engagement. By simply depositing funds for a period of time, users can participate in the consensus and governance process of the blockchain. It also suggests a way to easily create unearned income without a large investment in sophisticated technical know-how and special equipment. But since this technique relies much more on trust, you’ll have to do some due diligence to find the best option. Of particular importance is the smart contract used by the project, which should be free from bugs that could lead to loss of funds.

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