There is a way to earn more cryptocurrency without doing anything: you just need to hold it and get rewarded for that. This is called staking. Below we dive into the exciting world of blockchain consensuses and explain how one can benefit from owning (aka HODLing) some coin or token for a long period of time.
What is blockchain consensus?
While preparing this article, we had a lot of internal debate. On one hand, blockchain is tech in its very essence, and all negotiations and relations between parties within the system are entirely based on math and algorithms. So, some sufficient amount of tech mambo-jambo needs to be rolled out. On the other hand, basic economic projections of these ties and equations lay on the surface and can be explained in very simple terms.
Every blockchain consists of multiple storage units that, once one or several are lost, blocked or compromised, will keep working as a system because they replicate each other’s content. Supporting such storage units called nodes requires physical resources: mining hardware which is depreciating and needs updates, electricity, wire connection and some management attention. Thus, every blockchain needs to present its participants with a viable economic stimulus, i.e. reward for their activity to support the blockchain, and liquidity to materialize this reward. The way these bonuses or benefits are determined is called consensus.
Proof of Work
The initial concept of Proof of Work (aka PoW) was developed in 1993. It was a way to prevent denial of service attacks and other service abuse. The idea behind this principle presumed the system required some kind of work from the users, usually involving computer processing. In 2009, Bitcoin was introduced as a new way of using Proof of Work which became a consensus algorithm. From this moment onwards, PoW got to be used to validate transactions that are gathered into blocks, which are linked together to form a blockchain.
Since then, PoW has spread to become a widely used consensus algorithm and is now deployed by many cryptocurrencies. It is actually the dominant concept in the cryptocurrency market: blockchains that are using PoW have a combined market capitalization of over $200 billion, of roughly 80% of the market total.
Names that work on the PoW principle (or co-use it), are:
- Ethereum (initially, we will talk about its switch later);
- all major Bitcoin forks, which include:
- Bitcoin Cash;
- Bitcoin SV;
- Dash (aka Darkcoin);
- Monero (fork of Bytecoin);
- and several hundred more coins.
Miners activity, hashes and rates
BTC and its successors are often criticized for expensive mining. All nodes do calculations and burn electricity but only one winner gets rewarded, and lots of resources are spent uselessly in this tournament. Miners are getting paid for their work as auditors. They are doing the work of verifying previous Bitcoin transactions. Once a miner has verified 1MB (one megabyte) worth of bitcoin transactions, known as a “block,” that miner is eligible to be rewarded with a quantity of bitcoin.
Miners are not solving difficult calculative tasks, what they’re actually doing is trying to be the first to come up with a 64-digit hexadecimal number (a “hash”) that is less than or equal to the target hash. It’s basically guesswork. With the total number of possible guesses for each of these problems being on the order of trillions, it’s incredibly arduous work. In order to solve a problem first, they need a lot of mining hardware. To mine successfully, you need to have a high “hash rate,” which is measured in terms of megahashes per second (MH/s), gigahashes per second (GH/s), and terahashes per second (TH/s).
In the period from March 2019 to February 2020, Bitcoin hash rate has nearly tripled from 45 million to 115 million terahashes per second. In effect, this means it got three times more difficult for miner to get paid for its efforts. To give you the reverse figure, “difficulty” of finding the right block climber from 6 trillion to 15 trillion over the same period, meaning that the chance of producing a “correct” hash became one in 15 trillion.
Proof of Stake
Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins he or she holds. This means that the more Bitcoin or altcoin owned by a miner, the more mining power he or she has. As we established earlier, PoW requires huge amounts of energy, with miners needing to sell their coins to ultimately foot the bill. Proof of Stake (PoS) gives mining power based on the percentage of coins held by a miner.
Proof of Stake is seen as less risky in terms of the potential for miners to attack the network, as it structures compensation in a way that makes an attack less advantageous for the miner. Effectively, the more coins you own, the more are you chances to get to verify the block and be rewarded. Another way to increase this probability is to hold longer. Many version of this consensus increase rates for those cryptocurrency staking HODLers who keep their coins for three months and more.
What is HODL?
HODL is the most iconic meme that exists in Bitcoin today. It is a word used to describe the true lovers and supporters of a coin. Is has first originated during December of 2013, which is around the peak of the second big pump of Bitcoin history when the price surpassed 1,000 US dollars for the first time on crypto exchanges. On bitcointalk.org, a frustrated trader by the nickname of “GameKyuubi” started a thread titled “I AM HODLING”. The misspelled name was picked by the community and used ever since.
Ethereum PoS, Casper
Ethereum, crypto number two by all measurements, is switching to Proof of Stake some time in 2020 or next year starting the Casper protocol. According to the Ethereum’s EIP, the update will allow a ~5% yearly interest for anyone who wants to freeze $1mn (1,500 ETH) in Casper, and give 4% finders fee for anyone who discovers bad actors (slashing).
Validators will need to run clients at a minimum and likely connect a beacon node to participate. Staked coins are held for a fixed term of 3, 6, 9, or 12 months in an Ethereum staking wallet that is in synch with a smart contract. The amount of reward you will collect depends on the elapsed time – the longer you hold your coins in a staking wallet, the greater the reward will be.
Whatever the number ends up being, ETH holders will be able to band together in “Ethereum staking pools” to maximize their earning as return is tied to number of coins held. Popular staking calculators approximate that ETH staking rewards will stand around 6.5% per year or 0.27 ETH for every 47 days and 22 hours. Others say passive income will vary from 4.6% to 10.3% as on an annual basis, depending on chosen stake algorithm.
Staking cryptocurrency list
While we are waiting for the Ether option, other popular PoS coins to stake today are:
Staking coins like TRON and other liquid instruments give you around 1-3% annually, and Algorand and other recent market entrants can deliver annual yields up to 10-14% in their payments.
Cold staking is not related to Proof of Stake or a consensus mechanism. Cold stakers have no rights in generating blocks or confirming transactions. They receive interest, typically fixed percentage, for holding their coins. The most widely accepted cold staking currencies are Callisto and PIVX. Cold staking is available both in digital wallets and via exchange wallets.
Inflation effect of pricing
Of course, staking itself doesn’t guarantee you’ll get rich. When you keep your coins in some wallet, you get additional crypto. This has no correlation with the fiat world, and your amounts in dollars or euro can change significantly as prices for the cryptocurrency you own change. So, when selecting a currency to start staking, pick those anticipating growth. Make your bets smart!