In the past years Proof of Work (PoW) proved to be not a profitable investment anymore for the average crypto enthusiast and new ways of earning money in the industry emerged, such as Proof of Stake. Several exchanges and apps launched the possibility for users to stake crypto currencies, Tezos among the most popular.
The staking trend may lead to the impression of to a new passive income method that is relatively easy to embrace compared to Proof of Work, where mining requires high performance hardware to be purchased. I would like to point out that this is not the goal of staking, but rather to motivate people even more to hold a stake in the system and increase the network participation.
How Staking Works
Proof of Stake (PoS) is a consensus mechanism for Distributed Ledger Technologies (DLT) that is used for crypto currencies like Tezos, Algorand and soon Ethereum. The mechanism aims to reach consensus over the order of transactions in the blockchain network and who is eligible to add the next block to the blockchain in which the transactions are stored.
The PoS system requires the prover to show ownership of a certain amount of coins. The longer the coin held, the higher the coin age and the higher the likelihood to add a block to the chain and receive the share of staking rewards. Usually, there is a fixed inflation rate (e.g. EOS is at 1%), or better, a token holder dilution rate as opposed to Bitcoin, where a fixed amount of coins (21 million) is supplied and mined.
PoW is mainly criticized for proof of wasteful work and therefore PoS represents a valid alternative for a distributed ledger to operate more sustainable.
Essentially, it is possible to just claim the rewards by keeping the coins in the wallet for a period of time, delegate the stake to the validator in charge of securing the network who shares a percentage of the rewards or running validator node and receive the reward directly based on the stake.
In the following 3 unique ways of starting with staking are presented and discussed.
The Binance Exchange supports a variety of PoS-based blockchain systems and related coins that can be staked: Algorand, Tezos, Atom and Stellar among others. The Rewards range from 1 to 16% annually, paid on a monthly basis.
You simply send crypto coins from your wallet to the exchange, hold it for 30 days and then you initiate the staking process in the “Earn” tab.
If you don’t own a coin that can be staked, there is the possibility to trade it on Binance or make sure you trade it on a cheaper platform such as Coinbase. However, bear in mind the small amount of gas fees when sending ERC-based tokens to Binance.
I find Binance less usable (especially their mobile iOS app) than Coinbase, but the latter currently offers staking only in the U.S. and just for Tezos with a high fee, so that the end reward is only 5% annually, whereas Binance offers 6% to 7% in rewards.
Kraken is another option as well as Poloniex or KuCoin.
With its mobile app, you can not only monitor how many coins you have, but on top, you can stake these coins. Currently Ledger Nano only supports cold staking for Tezos with Ledger Live. Cold staking refers to staking coins in a hardware wallet that has no internet connection. If the holder moves the coins out of cold storage, he won’t receive the staking rewards anymore.
Trust Wallet is another alternative, although not being a hardwarde wallet. I have not seen this feature enabled on Trezor, maybe this will change in the future.
MyContainer offers a website and an app (which is very basic) to deposit and withdraw tokens that can be staked. There are many different tokens available, some have a very high yield.
Such sites usually charge a percentage of the rewards as a fee, in this case, they are different for every token.
There several price plans available with further tokens available for staking and other benefits, such as to be included in monthly giveaways, zero fees, covering costs if you run a node or shared master nod access to additional tokens.
Besides staking, my Container also lists Airdrops, which are worth checking out as well.
There are other sites that you might check out, such as Staked.us, Figment Networks, Stake Capital, Stakinglab or Staking Facilities.
Even Hedera Hashgraph plans to publish something similar they call proxy staking, which is described in one of their blog entries. However, the amount is probably lower compared to current PoS blockchains.
Ethereum plans to move to a PoS model, too. Vitalik Buterin has already evaluated and compared the approach to traditional PoW in 2013, you might want to check it out as further read here.
We will see how in the future the government or financial regulators want to regulate the whole adoption of crypto currencies. There is very interesting idea described in this paper, which illustrates how banks (yes, actual real world banks) could run validator nodes for a regulated digital dollar coin. I mean think of this: If the bank distributes their rewards to its users, it would finally make sense to store money on a bank account and receive some “interest” (in case it is a Proof of Stake model).