A quick disclaimer upfront: All information given in this presentation is researched and intended to be educational and illustrative to the specific topic as always. Any companies, products, people, or other items mentioned do not constitute an endorsement, recommendation, or relationship. Every owner has to do their due diligence, as the decisions and responsibility about any investment lie with the owner. This is no financial advice.
What is staking?
Staking describes the ability to earn rewards by holding cryptocurrencies on a particular blockchain in a particular setting. In this process, the assets are either blocked or limited in time, in which they may not be moved, for which the owner then receives rewards. This then provides an opportunity to generate cash from existing assets through long-term planning and deployment, based on the consensus mechanism of proof-of-stake.
As described in the previous SFM Labs presentation "The Blockchain," the consensus method proof of stake (or POS) uses a randomly chosen process to determine who gets to produce the next block. Blockchain users can - if they want to participate in the process - include tokens, which makes them validators. The amount of tokens is determined by the respective blockchain, after which the users are given the opportunity to produce blocks in the first place. The principle of distribution is random, but the person with the most coins and the most time in the network also has the greatest chance of generating the next block.
As a reward, the validator then receives the transaction fees for the block that he has produced and from which transactions originate. This gives the validators the incentive to stay on the blockchain as long as possible, as the profits can be generated over time and have higher chances with a longer duration.
How does staking work?
There are several ways to stake your cryptocurrency. If the currency allows it (such as Ethereum, Tezos, or Affinity), it can be staked in a specific staking pool. This staking pool is provided from the start with a percentage that describes the rewards and can adjust them in a variable way.
Thereby it depends on different factors, which influence the percentage profit participation by staking:
1. The volatility of the cryptocurrency:
The volatility of the cryptocurrency is crucial because when it comes to staking for a stable coin, the returns are mostly lower than for a new, riskier cryptocurrency. The risk here also determines the reward, because if you dare to lock away your cryptocurrency for a longer period of time and take the unsafe cryptocurrency, you can also get more as a return if you are successful.
2. The popularity of the cryptocurrency:
The popularity of the cryptocurrency forms a factor here, which forms the possibility of combination. The cryptocurrencies that are popular are widely offered and set with certain trading pairs, with freshly launched projects usually offering little to no opportunity to take advantage of a staking program.
3. The available supply
The cryptocurrency in itself, with its own potential, is also responsible for its expansion.
If a project is large and offers a variety of possibilities in terms of utilities, there will also be more offers to stake this currency and provide its assets. In the case of small projects, there aren‘t really large returns.
The staking pools themselves can also be designed differently. Staking pools are available in two variants: single staking and combined staking (also known as paired staking).
Single staking refers to the provision of an asset class to generate the same or other rewards. An asset class is used, such as Ethereum, which then allows you to select the respective area for staking in the desired staking pools in order to generate money in the desired currency. In this case, one can take Affinity for example, where it can be decided whether the token Affinity will be staked on Affinity's platform for Affinity or give SafeMoon as a reward.
Combined staking refers to the provision of two currencies. Here, mostly the main currency and another trading pair are taken, which then also results in the percentage yield through this pairing. With these pools, it is crucial with which partner is paired because the result of this pairing gives mostly always the Reward of the main currency, which one provided. An example here is PancakeSwap and the pairing of the in-house token CAKE with BNB or even volatile tokens.
In addition to the variants of stacking, there is also a temporal premise that plays a role. For example, some staking pools provide more rewards if the token is locked up for a longer period of time, while others with an open system impose a penalty for early withdrawal or do not provide any rewards at all until the time is saved. From this, it can be seen that there are two types of staking, the locked-in variant and the open variant where penalties are incurred for early withdrawal.
What is the benefit and disadvantages of staking?
Staking offers the opportunity to generate more money using your own existing currencies. Providing assets gives projects more security and offers the possibility of receiving rewards and profits for what is already there while waiting for the crypto value to rise in the market.
It can be disadvantageous if the currency is locked in tightly and you experience a rise in the market where you would like to sell your currency. Taking the profit at certain points in time with fixed staking is thus virtually impossible and you can miss opportunities in the market here. In addition, there are of course also some platforms that promise dubious high profits, but then use them to bring people into the system and lock in their currency. Here, too, there is of course always the dark side of people who try to steal cryptocurrencies or to make a profit from the user with the assets that have been set and released.
Future of staking
Staking is (especially in the DEFI system) a lucrative way to increase one's monetary value. The wide field of possibilities to stake one's own currencies is given and the profits are lucrative. However, caution is also required here, because just as new offers arise every day, new traps also arise.
Security is a big problem here. Many unlicensed, anonymously launched or unknown platforms take advantage of people's greed and dispossess people of their valuable savings. That's why it's important to always be aware of which platform is doing what and how. Because in the future, there will be more, new combinations and systems that will make staking more lucrative on a daily basis, but they will also take their toll.
And as the crypto world correlates and converges with Web3 applications, there will be good and bad here as well, because you can't predict innovation, but you can deal with it.