Ask CryptoVantage: Should I Be Staking Cryptocurrency?

What is Staking?

In the world of cryptocurrency, staking your tokens has become increasingly popular in recent years. Cryptocurrencies which operate on a proof of stake (PoS) network allow for staking opportunities. Some examples of PoS networks are Avalanche and Cardano. This stands in contrast to proof of work (PoW) networks such as Ethereum (before the 2.0 update) and most famously, Bitcoin.

In a PoS network, tokens can be staked on the network in order to improve various network functions, like security and maintenance of the blockchain. Stakers are rewarded for their commitment in the form of newly minted coins. Tokens are often staked for an agreed period of time. Staking periods vary across blockchains, so shop around for a staking commitment that fits your needs. To compare to traditional finance, staking with a PoS networks is similar to investing in securities or bonds as staking coins generates a yield in the form of new coins deposited into your wallet.

Some blockchains require certain accumulations of staked currencies before benefits come in-full. Although most of the time, the minimums are quite low. Just like any other investment, it’s important to do your research before diving into staking. When staking on a platform, some platforms offer benefits if you also subscribe to their service. It might be worth your while to investigate this if you plan on staking large amounts of cryptocurrency on a single platform.

To Stake Or Not to Stake

When it comes to investing in a PoS cryptocurrency, there is a question to be answered about whether or not you should stake your tokens on the network. One of the key differences between a PoS network and a PoW network is where the tokens come from. In a PoW system, tokens are mined by miners using computing power to solve equations and are rewarded for their investment in computing power by payment in cryptocurrency.

In a PoS network, coins are minted through randomly selecting a staker to produce the next block. Stakers get a proportionate chance to produce the next block based on the amount of tokens they have staked. For a simple example, if there are 10 tokens staked on the network, and you have staked 1 of them, you have a 10% chance of producing each block. Proof of stake substitutes the process of running energy intensive computers to produce blocks, which is faster and more scalable, but not necessarily better than proof of work blockchains.

A stake cannot be moved or traded while it is staked, since it is used for validating and recording transactions. There are a variety of different ways to stake, however, and liquid staking is one of the easiest ways for beginners. Using a liquid staking model, users can withdraw their stake at any time and even use it in DeFi.

Of course the fact that many stakers have to lock up their tokens can actually be a good thing for PoS networks leading to more stability and potentially price growth. In addition, there are some critics of PoW systems that believe that PoS systems scale better than PoW and are better for the environment than PoW systems. On the other hand PoW is considered more secure but even that is hotly debated. While this is a topic of debate, making an informed decision is a good part of a strong investing strategy.

To answer the question of whether to stake or not to stake: It is better to stake on PoS networks than not to stake. If you are holding tokens that can be staked, you may as well put them to work.

Conclusions About Proof of Stake and Proof of Work

The decision to choose between PoS and PoW is a subject of much debate these days. To make a good decision, you want to be informed about the value scheme of both systems. If you are a more active investor and want an active role in governance and earning on staked cryptocurrencies, then PoS might be the choice for you. Before diving in and investing in a PoS cryptocurrency, do your homework on the network that’s right for you. Some PoS networks have steeper requirements than others before the full benefits of staking are awarded.

If you are a less active investor, and are searching for a store of value in the face of rising inflation and other market variables, then a PoW network like Bitcoin might be your best bet. PoW systems lend themselves to a HODLer mindset and are more simplified. Buy low, sell high. Don’t worry about staking.

If your objective is to escape inflation, then a PoS network is certainly not the right move. PoS networks are constantly minting since it is the cycle of minting and staking that creates its value, so most PoS networks are constantly chasing inflation. If you don’t stake your stake-able tokens on a PoS network such as Avalanche or Cardano, then you are leaving money on the table. There is no cost to staking, and the rewards are somewhere between 2-15% APY depending on the PoS network. Of course if you DON’T stake then you are essentially losing 2-15% APY to inflation while other users benefit. It’s an important consideration.

If you’re holding PoS coins, the next step is to check out our staking guides.