If you are interested in becoming a cryptocurrency investor, staking is a practice you may have already learned a bit about. It’s an alternative to the original “proof of work” approach to verifying blockchain transactions gaining popularity in part because it is not the economically-unfriendly process that proof of work turned out to be.
Proof of stake is the alternative to proof of work many cryptocurrencies are using or considering for future use.
Proof Of Work Versus Proof Of Stake
Under proof of work, blockchain transactions where crypto is bought, sold, or traded are logged in the blockchain and verified by competing users or networks. Several people or networks may be trying to verify a transaction (using computers to solve complex math problems as part of the verification process).
That requires a potentially enormous amount of electricity, and there can be only one “winner” for the verification process. All others working on that same transaction must move on and dedicate more computing power to another transaction. So many networks laboring at the same time over a process that can have only one winner = a great deal of wasted electricity.
Proof of work is described as the earliest “consensus mechanism” for crypto, and some believe this process to be more secure than other options including proof of stake. But the trade-off is the wasted energy.
Proof of stake is different because instead of competing for the same verification opportunities, investors pledge some of their cryptocurrency as the “stake” or a promise that verification will be performed accurately and deliver the expected result–a transaction has been reviewed and declared to be legitimate.
Those who stake their virtual currency and fail to correctly verify a transaction risk losing some or all of their stake, depending on the commitment and the number of coins or tokens required as part of the stake.
As mentioned above, with the proof of stake process, instead of competing to successfully complete a blockchain transaction verification, the user pledges some of their currency in exchange for being favored with the ability to verify a transaction or a set of them.
When the transactions are successfully verified, the user gets a reward–new coins are minted and offered to the user.
You make the stake on a specific crypto protocol (you won’t stake Ethereum to verify Bitcoin transactions, for example), making this process quite specific to the currency involved. Some sources report that you may encounter some platforms that pay rewards in different crypto than that which is staked, but in general, you may find that the coin you stake is also the same currency in which you will be paid for verification work.
And remember, not all crypto uses proof of stake so you may be required to do some homework to find a currency that works for you in this process.
When you stake your coins, you are not surrendering them to someone else. You still own the coins, you are free to withdraw your stake and stop trying to get more verification opportunities.
But you will need to know the procedure for withdrawing and don’t expect to get your stake back instantaneously–it may be a longer process than you realize. Always read the terms of service and especially the fine print when such options are available.
Some refer to the process of staking and earning rewards as earning “interest” on your crypto. But beware of the indiscriminate use of such jargon–if you are interested in a specific type of return on your investment such as a bona fide interest payment, you’ll need to make sure the terms of service you agree to actually provide such returns.
There are risks to staking. One of them is the volatility of cryptocurrency in general. If you stake coins worth $200 today, and someone issues a snarky Twitter post about the value of that currency (sound familiar?) and it loses value, do you still have the same “stake” at work as you did prior to the price drop?
That is another area you will need to read the fine print to discover in any given blockchain operation using proof of stake. Don’t put your cryptocurrency to work in this way without understanding the exact rules that govern this area–you do NOT want to find out the rules the hard way.
And while it’s true (see above) that you can unstake your crypto you may be required to commit that currency to a minimum amount of time where they are not available to be bought, sold, or traded.
Keep in mind that the rewards paid for staking will vary–some may offer inflated rewards or over-valued coins. It’s a good idea to be wary of any investment opportunity that sounds too good to be true, rewards that feel too high to last long or even be legitimate.
Staking is just as unregulated as any other part of the crypto industry, and that’s important to remember at all times.
Who Offers Staking Opportunities?
The following is not an exhaustive list, but you will find proof of stake at work with the following crypto:
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.