What is Crypto Staking?

If you’ve been in crypto for more than a fortnight, you know the extreme ups and downs that can come with the asset class. It doesn’t take much time to become battle-hardened by the global cryptocurrency market. Have you ever wondered how you can make a little extra on your coins despite the roller coaster? Look no further. Staking allows a risk-free vehicle to earn more coins over time. Tomorrow will come quick enough anyway- why not earn a little for being an early investor in a technology that’s going to change the world? If you’re at this blog and you’re reading this, you’re early to crypto. You’re forward-thinking and you can tolerate a little (or a lot) of risk. You should be rewarded for that. As the asset class grows, it will be impossible for the types of staking awards available now to be around forever!

If done properly, staking can supercharge your returns from owning cryptocurrency over time. But before you start sending your coins all over God’s creation to get them staked, you should understand how the process works first. 

WTF is staking?

The thing that makes cryptocurrency most appealing is its decentralized nature. This also creates a problem- we no longer have one entity like a bank’s server verifying transactions. Instead, there are thousands of nodes on the network trying to reach consensus about which transactions have taken place. That word is really important- consensus. 

In another post I’ll talk about the two main ways blockchain networks try to reach consensus: Proof-of-Work (PoW) and Proof-of-Stake (PoS)- both are great but have drawbacks. 

With hundreds of millions or potentially billions of dollars being moved between different crypto wallets, it’s pretty fucking important that whatever the network consensus is, it’s correct. 

As most of us know, cryptocurrencies employ blockchain technology. Each go (“block”) of creating the digital ledger requires some computing muscle for voting. I’ll mansplain this whole spiel in another post with easy to digest examples, but the gist of it is that a select few lucky nodes on the network get to vote and create the next block, and are rewarded for doing so.  Computing nodes on the network confirm or deny transactions that have taken place- much like the consensus of a jury in a murder trial (too extreme of an example?) The jurors (voting nodes) in the case of Proof-of-Stake coins (i.e Cardano or Solana) are coin holders who have staked their coins. After the jurors reach their verdict on what transactions took place, they are paid handsomely both in transaction fees and token rewards of ADA or SOL. Since the pay is so great, everyone wants to be a juror. 

But the network wants to select the best, least-biased and randomized jurors so that the trial verdict cannot be manipulated by bad actors. Each year that crypto networks grow in value, there’s more and more incentive for these bad actors to come in and manipulate the system. PoS networks select jurors based on a) the amount of coins locked up (the more, the higher the chance of selection) and b) randomization to prevent too many jurors in the a) category from controlling the blockchain. 

You’ve gotta have a pretty big chunk of change to be selected as one of these jurors, and most of us individual investors don’t have that- enter staking pools. Much like mining pools in Bitcoin, users can create staking pools, where we pool all of our coins into one node (usually a server somewhere) and then split the profits when we get to be jurors. These pools are also online 24/7, and consume significant power resources. The person maintaining the pool that owns the computing infrastructure usually collects a tax on just the rewards from staking for providing the pool. Say a staking pool offers 5% APY, and has a 3% tax on rewards- and you have 2000 coins staked. After one year you would be awarded 100 coins before the tax, which is 97 coins after the tax. So your actual APY is 4.85% for doing nothing. Not bad!

One phenomena that happens with staking pools is pool dilution. Dilution is just as it sounds- more people joining the staking pool and thus smaller rewards because the pizza is split more ways. Due to the the randomized nature of juror selection in addition to choosing nodes with the most coins, there is a point of diminishing returns for staking pools even as they stake more coins in their pool. 

When logging on to staking sites and platforms, all of the above information should be available for you to see when you’re choosing a staking pool- the APY, staking pool tax, and dilution. Other things you should note are whether the rewards you earn will be restaked, and what the withdrawal lockup period is. If you have a designated jumping off point for a certain coin, you’ll want to know how long it will take to get your currency back so you can liquidate.

What does this process look like in the physical universe? 

Prior to transitioning to tech after my MBA, I did various engineering odd jobs for various branches of the US military. I did my undergrad and grad degrees in aerospace engineering- so I’m used to working with stuff that occupies physical space, creates controlled explosions, and occasionally crashes. I cannot refrain from thinking about things this way. For this reason a lot of computer science and technical processes that take place in cyberspace have seemed elusive for me to understand.

Thankfully, computing happens in the physical universe as well. Nodes in cryptocurrency/blockchain networks are simply computers located across the world that are online 24 hours a day waiting to be selected to be a voting node in the next newly formed block. Since it’s Proof-of-Stake, these computers aren’t burning a coal mountain’s worth of energy solving hashing functions. Once one of these computers gets lucky and is designated as a voting node for the next block, the machine confirms the transactions on the block and is awarded with fees and coins of that blockchain’s tokens. A portion of those awards are shared with you, the staker, depending on how many coins you have staked.

I always search if any of the coins I’m holding on my exchange accounts on Kraken, Coinbase, or Binance are coins that can be staked. Most of them are. I stake nearly everything I hold that can be staked, since I’m in crypto for the long run and believe in the technology. I suggest everyone do the same. Once you get your crypto staked, the key is to be patient. I’ve been finding that 5-10% of posts on Reddit, crypto Facebook groups, etc. have been people asking about when their staking rewards are going to kick in. For most coins it’s at least 15 days. History has shown that despite the drama, the trend with crypto coins is up and to the right ($$$). Much like reinvesting dividends in stocks, staking your crypto will accelerate the compounding returns it’s going to get anyway and might just rocket your balances into the 4th dimension of existence should we see anything like we’ve seen over and over again in the past with the crypto asset class.

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