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A Beginner's Guide for Pinoys on How Staking Works

2021-06-03

You may have staking considered as an alternative that is less resource-intensive compared to mining. Staking involves having funds held in a cryptocurrency wallet to provide the blockchain network with support in operations and security. Staking consists of the act of having cryptocurrencies locked to get rewards. Most of the time, you can have your coins directly staked from your crypto wallet, like the Trust Wallet. A lot of exchanges are offering their users staking services. Binance Staking allows people to earn rewards just by having their coins held on the exchange.

Get a much better grasp of staking by understanding how PoS or Proof of Stake works. The consensus mechanism called PoS lets blockchains operate in a more energy-efficient way as they maintain decentralization to a decent degree, in theory at the very least. Let us check out how staking works.

What is PoS or Proof of Stake?

Once you know how Bitcoin works, you will become familiar with the PoW or Proof of Work. This mechanism lets the transactions get gathered into blocks. These blocks then get linked together for the creation of the blockchain. Specifically, miners compete so they can solve a complex puzzle in mathematics. The one who solves this will have the right to have the following block added to the blockchain.

There is data that Proof of Work is a highly robust mechanism that facilitates consensus in a decentralized way. The problem with this is that so much arbitrary computation gets involved. Miners compete to solve a puzzle that does not serve any purpose other than making sure that the network is secure. In itself, this can cause the computation in excess to get justifiable. In case you feel like wondering if there are other ways to have decentralized consensus maintained without the need for a high cost in computation, the answer to this is Proof of Stake. Here, the main idea is to have participants lock their "stake" of coins at certain intervals wherein the protocol assigns the right to one of them randomly so they can have the following block validated. The probability of getting chosen is typically proportional to how many coins are available. Having more coins locked up can increase the chances.

It determines who the participants create a block that doesn't have a basis on how they solve challenges in the hash as it is with the Proof of Work. Instead, it gets determined by the amount of staking coins that they hold. People who argue that the blocks get produced through staking allow blockchains to have scalability at a higher degree. That is among the reasons why the Ethereum network planned for the migration to PoS from PoW in a set of technical upgrades that they collectively referred to as the ETH 2.0.

Who created the Proof of Stake?

Proof of Stake initially appeared from the 2012 paper of Scott Nadal and Sunny King for Peercoin. They described this as a design in peer-to-peer cryptocurrency that they derived from the Bitcoin of Satoshi Nakamoto.

The Peercoin network got launched with a hybrid PoS/PoW. It mainly uses the PoW so that the initial supply will get minted. Yet, it did not become required for the network's sustainability in the long term, which is why its significance gradually got minimized. In reality, the security of a lot of networks was reliant on the PoS.

What is DPoS or Delegated Proof of Stake?

Developed by Daniel Larimer in 2014 is this mechanism's alternative version that they referred to as DPoS or Delegated Proof of Stake. It initially got used as a part of the blockchain BitShares, but the other networks eventually adopted the model. Included here are EOS and Steem that Larimer also made.

Users are allowed by DPoS to have their coin balances committed as votes wherein voting power is proportional to the held number of coins. These votes then get used to having many delegates elected. These delegates manage the blockchain on their voters' behalf to ensure consensus and security. The staking rewards typically got distributed to these elected delegates, who then had part of their rewards proportionally allocated to their electors' contributions.

The model DPoS lets the consensus is achieved by validating nodes in a lower number. Because of this, it tends to have the network performance enhanced. On the other hand, this can lead to decentralization to a lower degree while the network becomes reliant on a selected small group of validating nodes. These are validating nodes that handle the blockchain's operations and overall governance. The processes of having consensus reached are where they participate in defining the critical parameters of authority. To put things simply, DPoS lets the users have their influence signaled through the network's other participants.

Staking: How does it work?

As previously discussed, blockchains in Proof of Work are reliant on mining to have new blocks added to the blockchain. In contrast to this, chains on Proof of Stake have new blocks validated and produced through staking as a process. In staking, validators are involved in locking up the coins to get selected by protocol randomly at intervals that are specific for the creation of a block. Frequently, participants have a better chance of getting chosen as the next validator of the block whenever they have more significant amounts at stake.

Doing this can let the blocks become produced without relying on specialized hardware for mining like the ASICs. As significant hardware investment is required in mining, staking needs to have a direct investment in cryptocurrency. Instead of having to compete for the next block with computational work, PoS validators get selected based on the number of coins they stake. Validators get incentivized by coin holding or "staking" as this aims to maintain the network's security. Whenever they fail to do this, the whole stake can eventually be at risk.

As every blockchain in Proof of Stake has a particular currency in staking, some networks have the two-token system adopted wherein the rewards get paid in a second token.

When it comes to the convenient level, staking means keeping funds in a wallet that is suitable to enable anyone to have various network functions performed in return for having rewards staked. Also included here is the addition of funds to a staking pool.

How can you calculate staking rewards?

Here, there is no easy answer. Every network in the blockchain may have a different way used for the calculation of rewards in staking. Some can get adjusted based on a block-by-block that takes a lot of factors into account. Included here are the following:

  • the rate of inflation

  • the number of coins that the validator is staking

  • the total amount of coins that get staked on the network

  • the amount of time the validator has actively been staking

  • other factors

When it comes to some of the other networks, staking rewards can get determined as a percentage that gets fixed. These rewards then get distributed to the validators as a form of compensation whenever there is inflation. Users are encouraged to have their coins spent instead of held because of inflation, increasing their use as a cryptocurrency. Yet, with this model, the validators can exactly have the expected staking reward calculated. 

The predictable reward schedule can appear favorable for some people instead of having the probabilistic chance of getting a block reward. Since this is public information, more participants can get involved in staking because of the incentives.

What is the pool for staking?

The group of coin holders with their resources merged to increase their chances of getting rewards and validating blocks is known as the staking pool. They have their staking power combined with having their contributions to the pool proportionally shared with the rewards.

Having the staking pool maintained and set up requires so much expertise and time. Staking pools tend to become highly effective on networks wherein there is a relatively high financial or technical entry barrier. Thus, a lot of pool providers are charging a fee from the rewards in staking that get distributed to the participants.

Aside from that, the pools can provide an added flexibility for any individual staker. Usually, the stake needs to get locked for a fixed period with the unbinding or withdrawal time set according to the protocol. Moreover, to disincentivize any malicious behavior, a substantial minimum balance is a requirement in staking.

Many staking pools have the low minimum balance as a requirement that appends to no added times of withdrawal. Thus, it would be ideal for new users to join a staking pool instead of getting to stake solo. 

Cold Staking: What is it?

The process of getting to stake on a wallet that doesn't connect to the Internet is Cold Staking. You can have this done using a hardware wallet, but it can also perform with an air-gapped software wallet.

Cold staking has support from networks that let users stake as they have their funds securely held offline. It can be worth noting that whenever the stakeholder allows their coins to get moved out of cold storage, they will no longer receive any rewards.

For prominent stakeholders, cold staking can particularly help people who want to ensure that their funds get maximum protection as they support the network.

How can you stake on Binance?

You may consider having your coins on Binance held by having them added to a staking pool. Since there are no fees, anyone can enjoy all of the benefits that having coins held on Binance can bring. You need to have your PoS coins held on Binance that every technical requirement will get taken care of for anyone. The rewards in staking can usually get distributed at the beginning of every month. You can have the previously distributed rewards for a given coin checked under the tab Historical Yield on the staking page of every project.

Closing Thoughts

Anyone who wishes to become a part of governance or consensus blockchains can have additional avenues because of staking and proof of stake. Aside from that, this can be an utterly easy way for anyone to earn passive income just by holding coins. That is because staking is becoming increasingly more accessible as the blockchain system and its entry barriers are getting so much lower.

It would be worth keeping in mind that staking doesn't entirely come without any risks. Having funds locked up in a smart contract can be prone to bugs, so it would always be vital to have DYOR and high-quality wallets used. One of these is the Trust Wallet. Make sure to check out the Binance staking page so you can see the coins that got supported for staking, which would allow you to earn rewards today!

Earn while you sleep with Binance Staking

The best cryptocurrency exchange in terms of users and trading volume is Binance Staking. It announced a P2P (peer-to-peer) trading platform in PHP or Philippine Peso. The company aims to provide Filipinos access to cryptocurrency in their local currency.

It can now be possible for Filipino Binance users to sell and buy ETH, BTC, BNB, USDT, EOS, and BUSD using the Philippine Peso. Binance has a Staking platform that allows Filipinos to do this without any transaction fees. Integrating this will enable the user to trade crypto in their preferred prices and payment modes. They can even have their crypto assets transferred to a Binance wallet without an added cost.

The platform's zero transaction fees offer an escrow service that ensures that all of the cryptos will go to the users' wallets. The Binance Staking platform lets users gain more access to various financial services. Since its launch in October 2019, Binance's Staking platform has supported approximately 31 fiat currencies. It was also able to process trades of more than $1 billion. For their Global Earn Merchants Program, the company now actively searches for local merchants with reliable crypto and fiat access. Here, verified merchants enjoy a lot of benefits. It includes exclusive support for customers, VIP discounts, ad transactions and postings, and security deposits without any fees.

Learn more about Staking by getting into Binance Staking now.