What is Staking?
Staking is a way to earn rewards by locking up cryptocurrencies for a specific period to secure and maintain the Proof-of-Stake blockchain network. The staking rewards are usually proportional to the amount of cryptocurrency staked and the time held.
Why Staking? Institutional-level Pros and Cons.
The staking incentive is intuitive: You can profit from crypto staking. According to CoinMarketCap and Staking Rewards on September 11, 2023, 124 blockchains already support staking. The entire Staking market capitalization is approximately $92.23 billion, with $5.32 billion in annual rewards.
The staking market is growing at a rapid pace. By September 11, 2023, the total amount of ETH staked had achieved a yearly growth rate of 85.62%, going from 13,601,293 ETH to 25,246,189 ETH, according to beaconcha.in. Wen Merge data shows that 39,284 ETH validators are waiting in the activation queue that day, which takes about 16 days for staking to take effect.
Staking rewards generally follow the snowball effect: the more you stake and the longer you stay, the more rewards you will get. As the ETH staking rate increases, the number of validators increases as well, and accordingly, staking rewards will decrease. Therefore, participating in staking with your cryptocurrencies to earn stable rewards is a good choice in the current bear market. The earlier you get in, the more you benefit.
- Passive Income
Staking cryptocurrencies is similar to depositing fiat currency in a bank; through both ways, the participant receives passive income, while staking has a higher APR. The Average APR for mainstream blockchains is about 6.18%. Specific APRs and reward payout time vary from protocol to protocol. Although the APR is affected by the protocol selection and how many times one stakes, it is still more profitable than fiat depositing in banks in the traditional financial market.
- Long-term Appreciation
Staking is a long-term crypto investment strategy that allows institutions to benefit from staking rewards and cryptocurrency value appreciation relative to fiat currencies. Typically, an unbonding period, between initiating a withdrawal transaction and returning all staked cryptocurrency to the withdrawal address, ranges from 24 hours to 28 days. Therefore, market participants who prefer short-term profit may need to consider the limited liquidity factor of staking and market volatility risks mentioned in the following parts.
- Stable Yields and Limited Risks
Compared with DeFi staking, protocol staking offers more stable yields and limited risks. Common DeFi staking consists of yield farming and liquidity mining. Some of the common differences are listed in the table below.
- Market Volatility and Unbonding Period
The cryptocurrency market is highly volatile. Understanding the potential risk of staking before adopting it as an investment strategy is crucial, considering that most blockchains have unbonding periods. Furthermore, unbonding periods entail an opportunity cost. If a more profitable investment opportunity arises while the funds are locked up, there is a potential risk of losing a gain.
- Activation Period
The activation period is the interval from staking cryptocurrency to getting rewards. Taking ETH as an example, validators usually have to wait in a queue for a certain amount of time before being activated to perform their duties and receive rewards. The activation time depends on the network status, i.e., how many validators are queueing.
A validator must support the network 7*24h and 356 days a year. Once it cannot maintain 100% uptime, it will face slashing, a penalty on principal. Slashing is usually triggered by downtime or double-signing. The penalties for the latter are far greater than the former. HashQuark provides slashing coverage to safeguard against digital asset loss exposure and has maintained a zero slashing incidence on record.
Differences between PoS and PoW
Proof-of-Work is a well-known consensus mechanism of Bitcoin. The main differences between PoW and PoS fall into these subjects: energy consumption, block proposal, risks, etc.
How does Staking work? Staking and Delegating
Proof-of-Stake is a consensus mechanism that selects validators for block proposals and attestations. You participate in the consensus mechanism once you stake cryptocurrencies to a blockchain. There are two primary staking methods: staking (PoS) and delegating (DPoS). If you choose to stake, you are the validator; if you decide to delegate, you are the delegator.
This process can describe staking:
- Stake a minimum amount of cryptocurrencies
- Launch validator nodes by yourself or a third party
- Help the network validate transactions/ monitor malicious activities/ propose new blocks
- Earning rewards.
Delegating is similar to staking. According to Avalanche’s description, the main differences between the two are as follows:
- Node setting: You don’t have to set up your own nodes. Instead, you delegate your tokens and duties to existing entrusted validator nodes.
- Minimum stake requirement: Validators usually have a higher minimum stake requirement than delegators, as they take on more duties in the network.
- Rewards distribution: If you are a delegator, you will receive rewards matching your share of the validator, after deducting the validator’s commission fee. If you are a validator, you can receive rewards directly.
- “Staking” is everywhere: Terminology Definition
In crypto, staking is poorly defined and widely used in DeFi dApps and native blockchain staking systems. Staking consists of protocol staking and DeFi staking.
The following are clear definitions of protocol and DeFi staking:
Protocol Staking: Staking native cryptocurrencies on PoS-like blockchains (e.g., ETH, SOL, MATIC, etc.). PoS-like refers to classical PoS and its variants like Delegated-Proof-of-Stake, Proof-of-History, Tendermint, etc. Since every blockchain is a peer-to-peer network protocol, staking directly into it belongs to the protocol level.
DeFi Staking: Providing cryptocurrencies to a lending platform or adding liquidity to a DEX for profit. Since all the platforms involved are DeFi dApps, this approach belongs to the DeFi level.
2. Not your keys, not your crypto: Non-custodial and custodial
“Not your keys, not your crypto” is a popular expression in the Crypto world. Without control of your key, all of your crypto could be lost. This statement is also appropriate for ETH staking. There are two types of ETH staking: non-custodial and custodial. The main difference here is whether you have complete control over your keys. That is a safety-convenience tradeoff. ETH 2 has two keys for staking: a validator key for duties and a withdrawal key for funds. Custodial service providers keep all keys of the staker. In contrast, non-custodial services allow stakers to keep the withdrawal key.
3. If you don’t know where the yield comes from, you are the yield.
Some cryptocurrencies may offer annual percentage rates (APR) higher than the market average. For example, AssetMantle offers an APR of 105.73% on Staking Rewards. However, it’s important to remember that there is no free lunch. The reward rate may not accurately reflect the actual returns due to factors like a high inflation rate in tokenomics, market volatility, etc. The inflation-adjusted actual APR of AssetMantle is 14.66%, much lower than the pre-adjusted APR. It is crucial to choose the cryptocurrency you want to stake wisely and do your own research (DYOR) to make informed decisions.
(Author: Andy Yang)