by Fredy from DragonStake
In this article we will talk about Staking, an interesting way to receive passive income for your tokens and at the same time actively participate in the security and governance of your favorite networks.
What is Staking?
The closest thing to staking in traditional finance would be a fixed-term deposit. Basically you agree to leave your funds blocked for a time and in return you receive interest. In the crypto world these interests usually range from 4% per year to things as spectacular as 50% per year.
What is Staking for? What does the blockchain gain by staking?
We continue with the analogy. In traditional finance, this fixed-term deposit allows your bank to have and use your money and get a return on it. For example, to lend it to another person or to invest it in other products. In Staking, what our deposit is used for is to give security to the network itself. The more funds there are blocked, the stronger and safer a network of this type is.
What do I get from Staking?
Networks that allow Staking allocate a certain amount of funds to encourage their users to Staking, that is, to block their funds in favor of network security. This is what we call the security budget. These funds are distributed proportionally among all those people who are providing that security to the network. This distribution translates into a reward percentage that, as we mentioned above, is usually between 4 and 50% and depends on how the economy and the security budget have been configured in each network.
On the other hand, when you do Staking you are also indirectly participating in the governance and decentralization of the networks. Networks of this type tend to have very active and dynamic governance. The decision-making power rests directly with the tokens in Stake. That is, your voting power will be proportional to the number of tokens you have put in Stake when making network decisions. Tokens that are not in Stake have no use in governance. In general, most users delegate decisions to their trusted nodes. By selecting your trusted nodes you are giving your voice and your vote to those nodes when it comes to approving or rejecting a governance proposal. In addition to that, if for any reason you are not satisfied with what was voted by your node, you can always exercise your right to vote. Your vote will prevail over what your trusted node has voted for. Sounds interesting right?
In the purely economic we can mention the returns of Staking in the most interesting blockchains of the moment. These are approximate and rounded percentages. It is worth mentioning that these returns remain very stable over time, contrary to what happens in other passive income protocols such as lending, or liquidity mining.
Annualized returns of some outstanding networks:
Polkadot, 14%
Kusama, 17%
Cosmos, 12%
Avalanche, 10%
Kava, 30%
Sentinel, 50%
Is it the same as having shares of a company on the stock market?
In a way, owning the tokens of a blockchain is already very similar to having shares of said blockchain. The mere fact of owning them already implies that we like this project and that we think that our tokens will appreciate over time. But doing Staking goes a step further, since it allows us to participate more actively in the project and commits us to it for a certain time. In return, our tokens will not only grow in value according to the market price, but we will be rewarded with more new tokens than we had.
Is staking safe?
Among all the possible risks in the crypto world, Staking is possibly the least of them. Ultimately it is all about the security of the network itself. If something were to go wrong, it would be the entire network, and not our funds. It is also an activity that generates a moderate income. And we already know that they are two concepts that go hand in hand. Big rewards usually come with big risks. As we are talking about moderate rewards we are also talking about moderate risks. In comparison we can say that the Staking quite safe.
Another important detail is that when you Staking your funds never leave your portfolio. That is, you keep custody of your funds at all times, even if they are blocked and you cannot use them at the moment.
What are the staking deadlines? Can I have liquidity?
Most of the Staking networks (we can begin to call them PoS networks or Proof of Stake networks) have blocking times of 3 or 4 weeks. That means that from the moment we decide to stop Staking we will have to wait that long to be able to freely dispose of our funds. There are networks that have tools to offer products derived from our tokens in Stake. For example, let's imagine we staking 100 tokens from a fictitious network where the tokens are called XYZ. After that, the protocol would give us 100 sXYZ in exchange, which represents our 100 XYZ in Staking but in a liquid state. So we could sell or use them at will. This only happens on some networks that have advanced DeFi tools. In the vast majority of networks it is not possible to do so. There are also centralized entities that allow you to Staking and have liquidity at the same time. In this case, you lose possession of your tokens and those entities guard them for you. They are the owners of the private keys that store your tokens. It is generally not advisable to use such services.
I have bitcoin…. Can I do staking?
I'm afraid not. Bitcoin was the first blockchain and Staking is relatively new. Only new generation networks use Staking as a security mechanism. We could say that BTC is a "non-productive" asset. The only thing you can do with it is buy and sell it. But you can't Staking it to get more Bitcoins. The market trend is towards productive tokens. The vast majority of recent networks use Proof of Stake. There are hundreds of them in recent years. While you can count on the fingers of one hand recent networks that do not use this security protocol.
What options do I have in the market for staking based on simplicity, profitability and security?
There are 4 large groups or ecosystems on stage where you can do Staking.
Cosmos (Tendermint)
Avalanche (Avalanche)
Polkadot (Substrate)
Ethereum (ETH 2.0)
We say ecosystems because within each of them we find a multitude of blockchains that use practically the same base code for their security (Staking) and that modify other parts of the code to adapt to different use cases.
For example, in Cosmos we have the Cosmos-hub that was the first of them and that acts as an interconnection between other networks of its family. But we also have Kava or Sentinel, which using the same code base (Tendermint) offer different use cases. In this case, Kava is focused on DeFi and Sentinel on anonymous internet browsing services (VPN). In all the networks of the Cosmos family we can do Staking in practically the same way and using the same wallet. It is the good thing about the "interchain", or fluid interconnection of blockchain networks. The most recommended wallet for desktop environments is Keplr wallet, which you can find here: https://wallet.keplr.app/
In the Polkadot ecosystem, all chains use the Substrate code as a base. We have 2 blockchains of relevant importance because they are at the center of all the others. They are Polkadot and Kusama. Around each of them we have a multitude of interconnected "Parachains" or blockchains. In all of them, as with Cosmos, we can make use of the same wallet and the same web interfaces to interact with them and do Staking. Although the level of difficulty is somewhat higher than in Cosmos. The most recommended wallet for desktop environments is Polkadot js extension, which you can find here: https://polkadot.js.org/extension/ and that you can then use on this other page from which you will have access to the entire Polkadot ecosystem: https://polkadot.js.org/apps/
What are the main risks?
The main risk in Staking is called Slashing, or "cutting funds." As we have mentioned the security of the network depends on the funds in Staking. If any of the nodes that maintain the network (validators) decide to undermine the security of the network then a Slash event may occur. The Slash can be considered as the "negative incentive" that a network node suffers if it does not do its job well. That is why when it comes to Staking it is very important to choose well in which node of the network you place your trust. If your trusted node does not work correctly you can lose part of your funds. In the Cosmos ecosystem that Slash can account for up to 5% of your Stakeout funds in the most serious cases. And only 1% in the event that your validator node (that's what we call the node in which you place your trust) is offline for many hours. On the other hand, in the Polkadot ecosystem the most serious mistakes are much more penalized. The most serious penalty (which has never occurred) can result in the loss of all funds. It is vitally important again to choose trusted and reputable validators so as not to be at some point at this type of risk.
Another risk of Staking is that we are exposed to an asset whose price can fluctuate. If we do DOT Staking on the Polkadot network and the DOT price goes up or down, then the value of our portfolio would go up or down in the same way. For this reason it is interesting to do Staking only in those networks that have good fundamentals, and of which we are convinced that we want to have exposure. With a well-founded choice of networks, we will always be in a position to manage market fluctuations in the long term. Without being investment advice, in this article we have only mentioned networks with interesting value propositions, but in reality there are hundreds of them. It is in each one the task of doing an investigation and a personal assessment when choosing one or another network to do Staking.
Stay tuned and subscribe to the newsletter if you have not done so yet because in a few days we will publish an article to become a staking pro and start receiving passive income 👇👇
Dragonstake
The DragonStake team has been present in the most important Staking networks long before their official launches. They have participated in the early phases of Testnet in all of them, which, in addition to a privileged place in the genesis block, has provided DragonStake with a very deep understanding of the ecosystem of which they are proud. DragonStake is also the first (and unfortunately unique to date) company dedicated to tax-based Staking services in Spain, proving once again that they are pioneers in this entire incipient ecosystem.
Web: https://dragonstake.io/
Twitter: @DragonStake
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