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Proof-Of-Stake

What Is Staking In Crypto and How Does It Work?

What is Staking in crypto and how does it work

Staking crypto is now becoming popular day by day as many people are becoming aware of it. It has emerged as another way for crypto investors to make money. More precisely, to produce a good passive income. 

But, if someone wants to make a profit out of it, they first need to understand the basics to make their investments more effective. To help you with that, we have created this article covering everything about crypto staking. Keep reading.

Introduction To The Staking Crypto

So, what exactly does staking crypto mean? In simple words, staking is the process in which you agree on granting a portion of your crypto to a blockchain network. The blockchain network uses your crypto for the betterment of the network–for example, conforming transactions in an enhanced way. 

High interest in your crypto stake is given to you in return as a reward.

Doesn’t it seem like the baking system? You put your money in the bank in the form of a fixed deposit, and the bank puts it to work for them. In return, you get interested in your deposited amount, right?

In terms of returns, staking crypto is considered much better than depositing money in a bank. But, keep in mind that staking your crypto comes along with some risk. And, if you are someone who can’t bear risks, then options like bank FD will work fine for you.

Remember that the feature of staking is not available in every cryptocurrency. It is available in only those that use the model of proof-of-stake (PoS). It is more efficient in conforming transactions and uses less energy than the proof-of-work model (PoW). Furthermore, we will discuss it in more depth. 

Understand The Mechanism Behind Staking Crypto

Staking is considered to be a new way that aids in confirming the transactions. This process of confirming transactions occurs only in the cryptocurrencies that use the proof-of-stake model. So, any cryptocurrency that uses proof-of-work won’t have the staking feature–for example, the largest cryptocurrency, known as Bitcoin. 

It basically works like this: 

You and many other parties grant some coins to a blockchain network. And, the blockchain network selects one of the parties as a validator to confirm the transactions. Once the validator successfully confirms it, they are rewarded with some new crypto coins. Probably, it will be the same cryptocurrency.

The selection of the validator mainly depends on how much crypto they have staked. The more crypto you stake, you are more likely to be chosen. 

Proof Of Stake Vs. Proof Of Work 

Many cryptocurrencies have adopted or are planning to adopt the proof-of-stake model and neglect proof-of-work. It has produced a debating topic of proof-of-stake Vs. Proof-of-work. 

  • The proof-of-work model is known as one of the most popular, secured, and decentralized ways to confirm transactions. Many cryptocurrencies use PoW, including the largest ones–Bitcoin and Ethereum. However, Ethereum is going to make the shift to PoS. 
  • Basically, in PoW, there are a number of miners that compete to solve a mathematical problem using high-powered computers. And only one of them gets selected for completing the transaction. The energy used by other miners to compete will be considered completely wasted.

The proof of work model has been criticized a lot because of the vast amount of energy it uses, worsening the effects of global warming. 

For the same reason, China banned crypto mining to lower carbon emissions and help reduce the effects of global warming.


To eliminate these issues, proof of stake takes the entry. 

  • In the Proof of stake model, a number of participants agree to lock up an amount of their cryptocurrency to validate transactions–with this act, they are considered stakers. The more coins a participant stakes, the higher his chances of being chosen by protocol. 

The protocol randomly selects the participant and assigns him the task to continue the process of validating the blocks. 

Do you see? In PoS, only one participant gets the responsibility to confirm the transaction. This way, the electricity isn’t wasted, and global warming is harmed. 

So, Which One Is Better? Proof Of Work or Proof Of Stake

Proof of work is considered the most secure model as it makes the attacker’s job extremely difficult. It uses high-security and complete decentralization to confirm the transactions, making many cryptocurrencies adopt this model. 

Keeping these benefits aside, PoW also brings vast disadvantages like high energy usage, increasing carbon emissions. This cannot be tolerated because of the current situation of the world as you already know how global warming is already affecting the earth and such activities as mining gives it more strength. 

In fact, this is the same reason why Elon Musk had to stop accepting Bitcoin as payment in Tesla. 

On the other hand, proof-of-stake comes with many benefits and solves the problems of high energy consumption by PoW. PoS helps make the blockchain network highly scalable and efficient in passing out more transactions through the system. 

But, wait, what if an attacker enters the network, buys a large number of the coins, becomes a validator, and makes their attack successful? 

Yes, it can be done, but the possibilities are significantly less. Because whenever someone tries to buy a very large amount of coins, a sudden surge in its price takes place, which makes it extremely difficult for the attackers to succeed.

Proof of stake seems to be a better option for today’s world. And, many cryptocurrency developers have already understood it–for example, Vitalik, the founder of Ethereum. The founder of DogeCoin is also working with Vitalik, to establish proof of stake in their network,

How Can Staking Crypto Benefit You? 

Staking crypto can be very beneficial. It doesn’t only benefit the blockchain systems but also investors. Here are some of the benefits of staking crypto. 

It’s environment Friendly 

Staking uses a mechanism that causes very little energy, ultimately helping the environment. It doesn’t require high computational power, which makes it much better than crypto mining. 

It Aids The Blockchain Network

Staking crypto helps the blockchain network process transaction more efficiently. Not only this, but it also helps provide high security to the system and make frauds negligible. 

Helps You Earn More Interest

Staking crypto has become one of the best ways for investors to earn a good amount as an interest on their stakes. Generally, it can provide you with good returns, but keep in mind that there are some risks as well, and we will discuss them in the very next section.

Are There Any Other Risks Of Staking Crypto? 

Here are some risks of staking that need to be considered. 

Some Assets May Come With Lockup Periods

There are some stakable assets in crypto that have a lock-up period. Which means, if you lock your asset for a period of time, you can’t unlock it until the period is over. Even if you are at a loss, you cannot do anything. This can leave a huge impact on your overall investment. 

That’s why it’s recommended to stake your crypto in an asset without a lockup period. Here you will have control over staked crypto. 

You May Have To Wait For The Reward 

There are many cryptocurrencies that don’t pay out daily and may take a long time to process the reward of stakers. 

If you are someone who is not comfortable with the long durations in receiving rewards, then you should stake your crypto in a way that pays rewards every day. 

The Validator

Yes, the validator may also create a risk–if he makes any mistake. 

To stake your crypto requires a validator node, and he should be aware of how to process the staking process with 100% accuracy to get good returns. 

Your May be Theft

Yes, there are chances that your wallet may be stolen. But it’s possible only if you are not paying attention to the security of your stakes. 

So, to not let that happen, make sure to use a trustworthy wallet. Do your research and see which wallets fit you.

The Volatility Of The Crypto Market 

The volatility is something that every crypto investor faces. The drop in the market price can be seen in a matter of time which may cause you a huge loss. 

Make sure to do full-proof research before staking crypto. Otherwise, you may see yourself at a huge loss. And we don’t want that! 

How Can You Stake Your Crypto? Investor’s Guide To Staking

Because of the tremendous benefits, many investors are turning towards the staking option. If you are also one of them, here are the steps you need to follow.

Step 1 –

Buy the cryptocurrency that allows you to stake crypto. There are many cryptocurrencies in the market offering the staking service. This may create difficulty for you in the selection process. But, still, it’s good to indulge yourself in research as it helps minimize the risks.

Also, keep in mind that many cryptocurrencies have a minimum staking coin requirement. So, make sure to have funds in your wallet to meet the requirements of the network.

Step 2 –

Pick up a crypto wallet to keep your staked crypto safe. There are many trustworthy wallets that you can use. For example, Binance, Coinbase, Kraken, etc. These are exchanges that help you stake your crypto within a few clicks. 

Step 3 –

After selecting the wallet, you can now transfer the minimum amount of coins to the cryptocurrency you have selected to stake. Most likely, your exchange will have the option to stake your crypto. They will have a separate page for processing the transactions of staking. Otherwise, you can use staking pools. You will have to transfer your crypto to a staking pool and then stake your crypto from there.

That’s it; you are done with the staking process. 

Wallet exchanges have made staking and overall cryptocurrency trading very easy. And, only hard work investors have to do is research for the best cryptocurrency in the market. 

What are some Cryptocurrencies In Which You Can Stake?

Here’s the list of some cryptocurrencies that help you to stake your crypto and earn a good passive income.

Ethereum hasn’t adopted the proof of stake model fully as the developers are working on it. But still, they are offering the staking process, which is good news for Ethereum lovers. 

Keep in mind that…

  • Staking crypto has benefits, but it involves risks as well. Due to that, it’s highly recommended to do good research on whatever cryptocurrency decides to invest in. 
  • There are many cryptocurrencies in the market, but not all of them are worth investing in. That’s why it’s good to attain knowledge and pick up the best ones. 
  • There might be some crypto scams as well. Make sure you educate yourself on this subject as well, so that you don’t fall for any false cryptocurrency. Blockchain networks are entirely decentralized, which may reduce cryptocurrency security – making scammers’ work more accessible.

Many experts have supported PoS by saying that it will be much more fruitful in the long term in the comparison of PoW. Many cryptocurrencies are already using PoS, and big cryptos like Ethereum have started adopting it. And these are the same networks where you will be able to stake your crypto. Otherwise, any network with the PoW model won’t serve you with the staking option. 

Final Thoughts 

Staking crypto can be a great way to build an excellent passive income source. The only thing that is required to do is–invest wisely. Staking can be definitely seen as the future of cryptocurrency as it uses the proof of stake model, which is much greener than the proof of work model.  

If possible, try reaching out to a cryptocurrency expert. He/she will be an excellent source to receive a good piece of investment advice. If that’s not possible, you can do it by yourself with the help of the internet. Almost everything is now available at your fingertips. You just have to avail it!

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Staking vs Yield Farming vs Liquidity Mining- What’s The Difference?

On your journey through the DeFi metaverse, you are likely to come across terms like staking, yield farming, and liquidity mining. They all refer to a client putting their resources on the side of a blockchain, DEX (decentralized exchange), shared security options, or some other potential applications that demand capital. 

Despite sharing a lot of similarities in terms of practical applications, there are a lot of aspects that are different from one another. 

Staking: An Overview

Staking is the most comprehensive amongst staking vs yield farming vs liquidity pools. However, unlike yield farming and liquidity pools, it consists of numerous non-crypto definitions that can guide you about your stake assets in a crypto network. 

Staking one’s reputation on something is a common phrase. This implies that you risk your integrity favouring a cause you believe in. A stakeholder is somebody who has an interest in a company or organization. This can include shareholders, employees, consumers, and anybody else who has a stake in the company’s success or failure.

Let us understand staking from the following aspects:

Definition

Staking is the act of putting up collateral as proof of a party’s stake in the game in the crypto world. The staker’s actions are in good faith if they have exhibited a financial interest in the protocol’s future success.

Protocol support 

Staking can be used to support various encryption and DeFi protocols in various ways. A shift from Proof of Work (PoW) to a Proof of Stake (PoS) is in progress in the Ethereum 2.0 paradigm. Validators will need to stake parcels of 32ETH instead of giving hashing power to the network to verify transactions on the Ethereum network and get block rewards.

  •  Centralized platform support: Users can stake their digital assets on centralized platforms like Nexo, Coinbase, and BlockFi. These organizations are similar to commercial banks in that they accept consumer deposits and lend them out to people who need credit. Depositors receive a part of the interest paid by the creditors, and the bank keeps the remainder. 
  • Polkadot network: Polkadot’s, Nominated Proof of Stake (NPoS) consensus method allows DOT holders to stake their tokens and designate validator nodes in exchange for an annual percentage yield (APY). Other protocols demand users to stake tokens in order to participate in governance decisions and vote.

 

  • Decentralized platform support: Other staking applications, such as PoS or centralized credit provision, work differently from CertiKShield’s model (a decentralized insurance alternative). It combines DeFi’s openness with the market’s most trusted security firm to create a whole new crypto industry: decentralized on-chain protection from losses and hacks. CTK stakers run the platform and get paid for the value they bring to the network. They can earn up to 30% APY by supplying liquidity to the collateral pool through CertiKShield. These tokens serve a vital economic purpose by underwriting the insurance policies taken out by other users who are willing to protect their assets in the case of a protocol attack or failure. 

Need for Staking

The future stakers must reason considerably the need to stake before staking their assets. Some protocols require staking to prove a user’s stake in the game or enable critical financial activities, while others merely employ staking to reduce circulating supply to raise the price.

Yield Farming: An Overview

Yield Farming or YF is by far the most popular method of profiting from crypto assets. The investors can earn a passive income by storing their crypto in a liquidity pool. These liquidity pools are like centralized finance or the CeFi counterpart of your bank account. You deposit your funds that the bank utilizes to credit loans to others, paying you a fixed proportion of the interest gained. 

Yield Farming is a more recent concept than staking, yet sharing a lot of similarities. While yield farming supplies liquidity to a DeFi protocol in exchange for yield, staking can refer to actions like locking up 32 ETH to become a validator node on the Ethereum 2.0 network. Farmers actively seek out the maximum yield on their investments, switching between pools to enhance their returns. 

Consider the following aspects for a better understanding of yield farming:

Definition

  • Crypto assets are stored into a smart contract-based liquidity pool like ETH/USD by investors known as yield farmers, and the practice is known as Yield Farming. The locked assets are then made available to other protocol users. These tokens can be borrowed for margin trading by users of the lending platform. 
  • Yield farmers serve as the cornerstone for DeFi protocols that provide exchange and lending services. They also help to keep crypto-assets liquid on decentralized exchanges (DEX). Yield farmers earn compensation in the form of an annual percentage yield (APY)

AMM support

  • Liquidity providers post two tokens — Token A and Token B, with Token B, typically being ETH or a stablecoin like USDC or DAI — in exchange for a share of the fees paid by users that use the pool to trade tokens.
  • The pool percentage that a depositor makes up determines the depositor’s returns. If their deposit equals one per cent of the pool’s depth, they will receive one per cent of the pool’s total fees.

Risks with double-sided and single-sided liquidity pools

  • Temporary loss is one of the prime concerns of yield farming in double-sided liquidity pools. Take, for example, an ETH/DAI pool; because DAI is a stablecoin, its value basis is the US dollar. 
  • However, the upward potential of ETH is limitless. As the value of ETH rises, the AMM adjusts the depositor’s assets’ ratio to ensure that their value remains constant. 
  • The disparity between the value and the number of tokens deposited is where the temporary loss can arise. The number of Ether equal to the first DAI deposit lowers as ETH appreciates.
  • When the depositor withdraws their liquidity from the pool, this temporary loss becomes permanent. Therefore, if the temporary loss is more than the fees, a liquidity provider might better keep their tokens than depositing them to a pool. 
  • Single-sided deposits with temporary loss protection are available from AMMs like Bancor. However, other yield farming and interest-bearing products, such as CertiKShield, cannot produce temporary loss by design.

 

YF glow point

Yield farming may be very profitable, especially early on in a project when your deposit likely makes up a significant portion of the pool. However, due to cryptocurrency’s intrinsic volatility and the inventive design of new financial instruments, there may be associated risks that the yield farmers need to consider before ploughing the yield fields. 

Liquidity Mining

Liquidity mining is widely regarded as one of the most critical aspects of DeFi success and an effective mechanism for bootstrapping liquidity. Just as YF is a subset of staking, liquidity mining is a subset of YF. The primary difference is that liquidity providers are compensated with the platform’s own coin in addition to fee revenue.

Let us go through the following features for a better understanding of liquidity mining:

Definition

  • The practice of receiving remuneration in the form of protocol’s native tokens by the users of a DeFi protocol in exchange for participating with the system is liquidity mining. 
  • It is the process of depositing or lending specific token assets with the goal of giving liquidity to the product’s fund pool while also earning money. 
  • A liquidity miner can earn incentives in the form of the project’s native token or, in some cases, the governance rights it represents. In most cases, tokens are generated based on the protocol’s programming. 
  • Even though most of them cannot be used outside of the DeFi platform that created them, the establishment of exchange markets and the excitement surrounding those tokens help drive up their value.

 Supporting platforms

  • Compound was the first to introduce liquidity mining when it began rewarding users with COMP, its governance token. This additional stream of income for liquidity providers can help cover some or all of the temporary loss risk they take on. 
  • Whereas COMP tokens flow not just to liquidity providers but also to debtors. For the first time ever, a borrower can receive a return on the loan they’re taking out thanks to liquidity mining incentives. 

Liquidity mining requirement 

  • LPs (Liquidity mining programs) can often stake the tokens they earn in pools, thus earning a return on their initial investment and the incentives they receive. 
  • Liquidity mining for a DeFi platform has shown to be a successful method of attracting liquidity. 
  • Liquidity mining methods are often limited to a set number of months or years: just enough time to get the protocol up and running. While token incentives are frequently inflationary, diluting hodlers, they are frequently limited to a set number of months or years.

An Outline of Staking Vs. Yield Farming Vs. Liquidity Mining

    Staking Vs. Yield Farming Vs. Liquidity Mining                                  

Conclusion

In general, liquidity mining is a derivative of yield farming, which is a derivative of staking. All the solutions are just methods for putting idle crypto-assets to use. The main goal of staking is to keep the blockchain network secure; yield farming is to generate maximum yields, and liquidity mining is to supply liquidity to the DeFi protocols. 

The APYs are frequently lucrative, and there are hundreds of different alternatives available. It is always a precautionary measure to inquire about the associated risks, the reason for the requirement of your tokens and the mechanism to generate returns. 

If you are wondering on how to learn blockchain, then blockchain council is available at your service. You can search out for various blockchain courses available, and choose the one that meets your eyes and become a certified professional.

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What is Polkadot? What makes it one of the most trending blockchains right now?

What is Polkadot What makes it one of the most trending blockchains right now

The blockchain ecosystem is undoubtedly dominated by the crypto whales like Bitcoin and Ethereum. However, in such a scenario, Polkadot is emerging as a next generation blockchain network with a host of features and services. 

The capability of Bitcoin in transferring value without the presence of central authority was limited in terms of scalability as well as interoperability. This helped pave the way for the Ethereum blockchain to rise. Ethereum brought about a platform where one can build and run multiple applications without intermediaries; it also introduced value transfer through smart contracts.

However, owing to the extremely high gas fees and congestion in the Ethereum network, many projects are being dropped. This is exactly where Polkadot comes into the picture. The rise of Polkadot has been stratospheric ever since it was released in the market. DOT, its native currency, was listed among the top 10 cryptocurrencies just a few months after its launch. 

What is Polkadot? 

Polkadot was founded by Gavin Wood, a brilliant computer scientist who also helped co-found the Ethereum network. This platform allows users to use multiple blockchains in order to transfer values in a trustless environment while leveraging only one secure channel. According to Wood, Polkadot is the answer to the network upgrade of Ethereum 2.0, which is currently underway.

Polkadot has focused seriously on emerging as a heterogeneous and fully scalable network aiming to develop multi-chain technologies. The Swiss organization named Web 3 Foundation, which basically governs the network, believes that Polkadot is the future of blockchain.

How was Polkadot created?

Polkadot began as a white paper that was developed by Wood back in 2016. Gavin Wood was a former CTO of Ethereum, and he is the one who had developed the Solidity programming language. 

Polkadot came into being from a precursor project which was named Kusama, in 2019. It was developed as an unaudited canary project. The Kusama project also boasts of faster parameters for governance with low entry barriers. It is also an independent and standalone network. 

Polkadot was initially launched back in May 2020 as a PoA or Proof of Authority protocol. A single Sudo or super-user account was used to control its governance structure. Validators joined the network after it was launched in order to participate in the consensus protocol. 

On the 8th of June, 2020, the network quickly shifted to a more well-tested Proof-of-stake (PoS) protocol. The super-user account was abandoned in July last year as a decentralized group of validators secured the blockchain network. Thus, the network was gradually moved in the hands of the DOT token holders. This ingenious paradigm shift helped Polkadot achieve its objective of becoming a decentralized network. 

DOT- the native token of Polkadot

The DOT token currently ranks number 8 among the largest cryptocurrencies by market capitalization. DOT is a utility token that provides features such as bonding, staking, and governance in their network. 

The feature related to governance allows the holders of the DOT coin to have a sense of control over the Polkadot network. For example, the holders of the coin can determine the operating fees of the network, schedule the addition of any new parachains, and the auction dynamics. The holders also have the authority to decide when to execute upgrades and carry out fixes on the network when and if necessary. 

The DOT token has the ability to add parachains. This function is known as ‘bonding,’ and during this time, the tokens are unavailable for use. However, they are again released once the parachains are removed.

The architectural technology of Polkadot

In its objective to become a heterogeneous network, Polkadot functions in a different manner than Ethereum. Parachains and parathreads are used, which connect to Polkadot’s primary Relay Chain. In addition, the platform contains bridges through which the chains can connect to external networks.

The Polkadot network comprises three different types of chains. 

  • Relay Chain 

This is the central point of focus in the Polkadot protocol. It is the primary driving factor behind the network’s consensus, cross-chain interoperability, and shared security. It is also the primary blockchain operating in the network. This is exactly where transaction blocks are completed. Also, the Relay Chain takes care of the value transfer as well. 

  • Parachains

These are independent and standalone blockchains that are featured on the Polkadot network. These blockchains are custom-made, and their purpose is to address special challenges and serve specific objectives. These parachains utilize the computing resources available on the Polkadot network to authenticate the accuracy of the transactions. Even though they use the shared security aspects of the Polkadot network, they have the freedom to design their own systems of governance.

  • Parathreads

Parathreads have the same functional capacity as parachains, with only a few exceptions. These are basically parachains developed based on a pay-as-you-go model instead of leasing an entire slot. As a result, these are ideally suited for projects that do not require steady access to the aim network.  

Other notable features of Polkadot include:

  • Bridges – Bridges are the key to obtaining the interoperability aspect of the network. This is a crucial feature that enables the network to link to external networks like Ethereum or Bitcoin.
  • NPoS or Nominated Proof of Stake – The network uses a highly advanced consensus algorithm through the NPoS protocol. The function of using this protocol is to enhance the shared security of the network. This makes sure that none of the parachains can be corrupted. 
  • Substrate Framework – This is a software framework that has been designed by Parity Technologies. The substrate technologies aim to create custom blockchains.

Conclusion: the future of Polkadot

The overwhelming popularity of Ethereum has led to extreme network congestion, and highly expensive gas fees have led to dissatisfied users. As a result, they are searching for better and safer alternatives. Experts believe that Polkadot can provide a more viable and better solution. In addition, developers believe that its multichain Heterogeneous Network is easier to build And allows projects to be deployed with much more ease. 

The developers prefer to leverage the blockchain community of Polkadot to create awareness for their projects. Polkadot appears to be ready to continue its quest to develop a perfect blockchain network that can function in a trustless environment, transfer values, and seamlessly validate data. To understand the investment opportunities in the DOT coin, it is always advisable to learn cryptocurrencies or get a blockchain certification done to understand the pros and cons better. With its roots in the DeFi ecosystem and many other areas of digital assets, the Polkadot blockchain has a long way to go.

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