We’ve already had an article, covering the topic of staking, but we did a quick revision and understood it was quite too sketchy, so we need a bigger and better one. Here it is.
Staking is locking some amount of crypto in your wallet, allowing a net to use it for governance and supporting chain’s proper work. Staking is the analog of deposits in traditional banking and will allow you to earn annual profit, that might depend on the net you are staking in. PoS (Proof of stake), which is the most used consensus algorithm right now uses staking to approve or disapprove transactions through the net. The more of net’s tokens are locked on some node, the bigger influence on the net it has - every node is allowed to create new blocks, expertise transactions and execute them inside the net. Every wallet that has coins locked inside is used as a dedicated validator, which only requires its user to send coins into the smart-contract that will divide the coins between other validators and reward you afterwards. The rewards can differ from tens to hundreds of percent depending on the amount of coins locked, but staking also produces new coins, so there is usually a limit.
DPoS (Delegated proof of stake)
DPoS is an algorithm that is based on regular PoS, but doesn’t require creating a node to have the ability of staking. The tokens can be delegated to a validator that unites a separate system of high-efficiency nodes. Many more algorithms were developed after the DPoS introduction.
LPoS (Leased proof of stake)
Is very similar to DPoS, but the coins are leased to other bigger nodes and not to validator nets. The algorithm is used in the Waves project.
NPoS (Nominated proof of stake)
Has three types of blocks: nominators, validators and collators. Collators suggest block candidates to validators, which are then reviewed and executed by validators. Is now used in Polkadot.
PoSA (Proof of staked authority)
Grades the validators with authority using a dedicated proof of authority algorithm and then executes the operations using regular Pos. BnB Chain uses PoSA.
Not every application that wants to have their separate net can afford building and tuning a full PoS algorithm. That’s why you may find other applications, offering pre-built algorithms, that only have to be connected to the application interface. Staking providers can also analyse the profitability of staking and show whether the project is giving too much yield to stakers or not.
Even though staking is a sometimes highly profitable is still has risks. Some projects may lock your tokens for a term, that can reach up to a couple years. As it was said above high profit PoS can also lead to inflation of the coin, you get paid for staking. Also keep in mind that the net can be hacked and you may lose all your coins because of the project’s low security.
That is everything you have to know about staking, but as always we have even more coming. So stay tuned!