Generating new coins for the cryptocurrency is done by either a Proof-of-Work system, like Bitcoin where users use hardware to solve a computational puzzle or a Proof-of-Stake system where users effectively freeze their assets to have a chance of being able to mint the next coins. Typically, the more coins you have ‘staked’, the higher your chances of being chosen to add the pool of coins. However, the algorithms are designed such that all delegators will receive their expected Stake over time. Staking also has the benefit of being significantly less memory intensive than Proof-of-Work processes and is more inclusive of those who hold that currency.
Many coins in the market are now stakable, with Ethereum and Cardano being the top two coins. Other coins like Tezos, Polygon, Theta and Polkadot are also capable of being staked. To stake the coins, you need to delegate your coins for staking and to freeze them for a minimum period of time. This might vary from coin to coin, however Cardano for instance, requires 3 epochs before you can start receiving rewards, where an epoch is 5 days. Changing pools, does mean you need to restart the timer, but you will still get rewards from your old pool during that time. As long as there is not a gap in staking, it will be a smooth transition.
Since the likelihood of receiving coins to mint is roughly proportional to the amount of coins you have staked, each cryptocurrency has owner operated pools into which people can delegate their coin. In this manner, people can pool their resources to create a bigger stake and thus ensure a higher chance of getting coins to mint. The delegators always maintain full control of their coins, the coins never leave their wallets and can be removed from the pool at any time. All staked coins will receive rewards in long run, but larger pools will receive rewards more consistently
Creating a staking pool, requires the owner to declare a pledge for which they permanently lock away those coins over the lifetime of the pool. Additionally, there is a refundable deposit paid by the owners to ensure that they are committed to operating the pool. This pledge amount and deposit can vary from crypto to crypto. e.g. Ethereum requires 32 ETH, Cardano 500 Ada and Solana as little as 0.5 Sol.
Should I stake my coins?
In most cases, yes, if you have coins which can be staked and are not continuously buying and selling, then you should consider gaining rewards through staking. Typical returns on staked coins are between 5-10% per annum and so can often be a steady source of income. Some coins even offer voting rights based on the amount of coins staked.
The crucial question becomes where to stake your coins?
Choice 1: Exchanges, because they handle such large volumes of coin, typically have multiple pools of the largest size and this ensures a steady stream of rewards for the delegators in those pools. The downside is that Exchanges tend to have highest fee structures compared to other single operator pools, often 5 to 10 times higher and so delegators who stake over the long term will miss out significant rewards if staking with an Exchange.
Choice 2: Individual Operators, do typically, have smaller fees than the Exchanges but can struggle to gain volume in the pools and thus have infrequent rewards. Although the rewards are designed to even out across all pools over time, for Short and Medium term delegators this can run the risk of not seeing any rewards at all.
Who should I stake with?
When choosing who to stake with or even whether to invest into coins to stake, it is important to consider the potential rewards in the system and also the reliability of the operator. In many cases, the fees taken by the Pool Operators can be adjusted without notification. Do some research into the people running your staking pool and also whether they are technically capable of generating the rewards when it is their turn. Staking Pools need to be always online as outages could mean missing the chance to mint a coin. Unreasonably high or low fees should also be investigated before delegation as they might relate to people who have not considered the full cost of running a pool or are simply price gouging.
It is important to note though, Crypto is still very much a decentralised, community led enterprise. And so, choosing a pool can quickly shift from splitting the difference on minimising your fees or maximising your returns, to finding your corner and what you relate to.
Disclaimer
As always, NeoCasbah is not offering financial advice, nor are we financial advisors. CryptoCurrencies are inherently volatile and your assets are at risk. At NeoCasbah, our intention is to help you navigate the Crypto world so that you know where to start looking for answers. Everyone is different, so find what works for you. Stay safe!