The cryptocurrency sector has been stuck in the throes of winter, with price action consistently falling since January 2018. We saw a brief respite recently, when the price of Bitcoin surged back above $5,000. Still, with crypto prices a fraction of what they were a little over a year ago, mining has become much less profitable for the majority of people.
With decreased profits and high energy bills, many miners have decided to switch off their rigs and look for alternative ways to make money within the crypto industry. The latest trend to make a passive income in the crypto industry is through a process known as staking.
What Is Staking?
Traditionally, in PoW (proof-of-work) algorithms, miners will provide hashing power from their machines to secure and maintain the blockchain network. As an incentive, miners are rewarded with coins as they find new mining blocks. However, with the reduced income from mining due to low cryptocurrency prices, the process has become financially unsustainable when taking into account the costs of electricity and mining hardware.
This is where staking comes into play!
Staking is available with all cryptocurrencies that use the PoS (proof-of-stake) consensus algorithm. The staking process involves users locking their tokens within a wallet which is then used to secure the network, validate transactions, and produce new blocks. As new blocks are found, the stakers are rewarded with a staking reward.
The attraction for staking has grown over the past few months largely because it takes very little effort to set up and allows users to earn a passive income.
What Coins Can I Stake?
There is a wide range of coins available to choose from when it comes to staking. In this article, we will cover Decred and Neo.
Decred – DCR
Decred is a cryptocurrency that prioritizes decentralized governance and decision making on the blockchain. It uses a hybrid consensus algorithm that involves both PoW and PoS. This greatly reduces the potential for miners to be able to centralize the mining within the network.
Users can earn rewards from Decred’s PoS algorithm by purchasing voting tickets on the network. All you have to do is buy voting tickets within the Decred wallet and hold them. Each time a block is found, 30% of the total block reward is then shared between the voting ticket holders.
NEO
NEO is a China-based cryptocurrency that has long been touted as the proverbial “Ethereum killer.” Regardless of whether it will actually succeed in toppling the vice-regent of the cryptocurrency world, NEO holders can earn rewards by simply holding NEO.
The NEO blockchain uses a Delegated Byzantine Fault Tolerance consensus mechanism (dBFT) that allows users to vote for the bookkeepers that maintain the blockchain and generate new blocks.
However, users can earn a passive reward by accumulating GAS in their wallets. GAS is the cryptocurrency fuel that drives the NEO blockchain.
Risks Associated With Staking
However, with staking comes a great security risk. With most coins that can be staked, the staker must keep his machine online all the time. This creates a problem for users, as staking in their hot wallet leaves their IP address public, which can make them a target for hackers. As soon as a machine has been compromised, the hacker usually will go straight to the private keys that are being staked.
Some users prefer to stake in a cryptocurrency pool, but they are still vulnerable to the pool being hacked in the exact same way.
The Solution: Cold Staking
A solution that’s making waves in the community is cold staking. The process of cold staking functions through a smart contract that delegates the staking powers of a particular wallet to a staking node.
The staking node will always remain online. However, the staking node itself contains no private keys. The staking node provides the resources to the blockchain and stakes on the behalf of another wallet without being able to spend the coins in any way.
Particl coin is one of the first projects that have implemented cold staking successfully. The project allows users to assign their Particl coins to their staking node and stake with peace of mind, knowing their coins are safe.
Taking one step further, Particl has also launched cold staking pools, allowing users to delegate their coins to the staking pool and let them stake on their behalf. By using a cold staking pool, the user simply just has to set up the smart contract and then sit back and watch their passive income accumulate. They don’t even need to keep their machine on, and can keep their coins safely secured in a hardware wallet such as a Ledger.
The cold staking solution, used by other coins such as Stratis coin and NavCoin, is the best procedure for users to stake their cryptocurrency without fear of being targeted by hackers.
A Shift Toward More Energy-Efficient Algorithms
Ethereum is leading the way in the shift from the energy-intensive PoS to more energy-efficient PoS algorithms. The Ethereum team have been making progress in ensuring the developments for this switch are in place, with the most recent hard fork upgrades Constantinople and St. Petersburg laying the foundation for the transition to PoS to occur.
The team recently delivered an Ethereum 2.0 testnet, proving that Ethereum’s shift to PoS is on the way.
Will other PoW-powered blockchains follow Ethereum’s footsteps and move toward energy-efficient solutions?
Conclusion
Staking has provided another avenue for users to earn a passive income within the cryptocurrency sphere. Unlike mining, staking is an extremely simple process, which the majority of cryptocurrency users can understand and implement.
However, due to the security flaws that staking brings, users will need to be aware of how to protect their assets before they commit to staking. One solution is to just use a VPN, but this is not a bulletproof method. The best solution is for users to cold stake their coins on the projects which have already implemented it. This will allow users’ coins to be safely stored offline while they simultaneously reap the rewards from staking them.
