How staking works and types of staking| lesson 2 | 10% tron-fan-club |

How staking works

The concept of Proof of Stake (PoS) involves this type of mining, where instead of the computing power of the participants, you just need to store crypto assets in your account. However, PoS participants have a limited percentage of possible transaction verifications.

The principle of operation of another basic algorithm of the crypto world - Proof of Work (PoW) is completely different: users use the power of their computer and receive coins as a reward. This is how PoW transactions are confirmed.

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Pool members on the Proof of Work algorithm are called miners, and their competitors, earning profit without using computer power, on the PoS algorithm are called forgers (from the English forger - “blacksmith”). The remuneration of forgers is limited by the commission for the execution of transactions. At the same time, the profitability is determined by the “age” of the coin, which is obtained by multiplying the total number of coins by the duration of their storage by one forger. A user who has a certain amount of coins on his account can become a forger.

An example of POS is ETH 2.0. This is a smart contract that was launched in December 2020 and provides for ethereum staking. Participants must stake at least 32ETH to the smart contract. Once this contract raises 11M ETH , the ETH 2.0 mainnet will go live and the Ethereum blockchain will transition to the POS algorithm.

In this case, there is a significant drawback - the blocking of ETH occurs before the full deployment of the ETH 2.0 network, which can take a long time.

Types of staking

The DeFi (Decentralized Finance) market is basically built on providing liquidity. Users fill special liquidity pools with their cryptocurrency, for which they receive a reward.

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As illustrative examples, analysts highlight the projects AAVE, Compound, Uniswap, Bancor, 1inch. These are mainly algorithmic market makers (AMM) and decentralized exchanges (DEx). They need locked liquidity in the protocol that balances supply and demand in the market.

According to experts, in this case, staking cryptocurrencies carries certain risks. Basically, these are vulnerabilities in smart contracts that lead to the loss of user funds. For this reason, there is a huge variation in annual returns: from 10 to 400% per annum.

The largest cryptocurrency exchanges also provide their users with the opportunity to earn passive income. Binance and OkEx remain the key players. Both sites are well suited for staking, because the process itself is simple and intuitive.

Often, large trading platforms themselves launch their own nodes to validate PoS blockchains. Allowing exchanges to receive a percentage for validity, this in turn contributes to assets being accumulated in the exchange sites.

The profitability of staking on Binance, according to analysts, is a good option, since often the freezing period does not exceed a few days. But do not forget that storing cryptocurrencies on the exchange carries certain risks, since exchanges are sometimes hacked.

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Staking on a hardware wallet is often referred to as cold staking. Networks that support cold staking allow participants to have the necessary share of coins and take part in block validation, safely saving their funds. However, if the stakeholder withdraws his coins from the cold wallet, he stops receiving rewards. This method is well suited for large holders, as it provides maximum protection of funds while maintaining the network.

Another interesting option for passive income is staking stablecoins (USDT, USDC, BUSD). This is often times better for thoses who are used to storing capital in fiat.

For staking stablecoins, you can use projects such as AAVE, Compound, Curve Finance, Bancor, as well as other DeFi projects . Cryptocurrency exchanges also provide an opportunity to stake stablecoins.

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Earnings from staking stablecoins are very similar to a standard bank deposit, but with much higher interest rates.

In this case, earnings on staking range from 3 to 10% per annum. Some particularly rear cases the percentage mey be higher. Like staking USDT would be more profitable than USDC. Moreover, this option may not be suitable for beginners, since for such operations it is necessary to clearly understand how the project works and be aware of all the risks.