Proof of Stake (PoS): Pros and Cons of Staking as a Tool For The Passive Income
Introduction
All the cryptocurrency coins are divided into 2 main logical types:
Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Stake (PoS) concept states that users can mine or validate block transactions depending on how many coins the user has (holds) in a personal account. The more coins the miner owns, the more mining power the user has.
Proof of Work (PoW) concept states that users mine with their own computers and get coins as a reward. This is the way the transactions are confirmed.
There are also some coins, which combine PoW and PoS. So, there are 3 possible ways:
- Only PoS coins, that are “pre-mined” and just were sold during the IPO;
- Use of PoW and PoS hybrid;
- Use of PoW only as a distribution method until a certain time and then use only PoW.
Today we will have a detailed outlook on the Proof of Stake (PoS) system.
Instead of investing the users’ power resources to process transactions, transaction node operators stake their own coins as insurance. For all the valid transactions, people staking coins are rewarded by being credited with new coins.
Everything is simple — just keep the coins in your wallet, and you will be rewarded for this.
The process is very similar to the principle of bank deposits with a reward over the deposit time. However, unlike the way the bank works, the placement of the coins cannot lead to the negative percentage or any hidden fees and taxes.
Wonder how to use Stacking?
Select the appropriate currency and hold it in your wallet with the access to the Internet in a 24/7 mode. The asset must support the PoS, and the wallet must be constantly connected to the network (without any breaks). The biggest drawback of this system is a mandatory need in wallets connection to the Internet, it’s also necessary to receive your rewards.
Some great news for beginners and those who don’t want to study any new “hard” technology — you do not need to understand the details of how PoS works to use Staking of your cryptocurrency assets and be rewarded.
Can I use Staking as the only income?
Of course, the concept of receiving rewards for storing cryptocurrency looks quite attractive, but, unfortunately, no significant profit can be expected. In most cases, the rewards for stacking are less than the usual rewards for blocks issued by the network.
Also, it is worth noting that the “bonus” is distributed among all the coin-holders. For example, if the user X has 1% of all issued coins, he is entitled to 1% of the reward received when a new block is found. This is a very rough description, but it shows the general principle of the PoS algorithm.
Depending on the price of the cryptocurrency, the reward for stacking can still bring different passive income. No one can argue with the fact that every dollar you’ve earned for holding coins, without any additional needs — is easy money, especially in the world of cryptocurrencies. Usually, for a year, users earn a few percentages of their stacking balance.
Key Pros of Staking:
The key difference from PoW is the formation of a block in cryptocurrencies on this algorithm that occurs in a random way. In case of PoW, miners use equipment, which chooses the only true number (nonce) to find a new block. The more powerful the device hashrate, the higher the miner’s bonus is.
Thus, staking is a useful and not as expensive way to make money on cryptocurrencies as PoW mining is. Stacking is well known for its high-security level, especially minding the 51% vulnerability to attacks due to the fact that network participants must compete with each other and maintain a certain level of coins in wallets.
The most popular cryptocurrencies for Staking:
- Dash — one of the first cryptocurrencies that introduced the mechanism of staking.
- Decred (DCR) — declares decentralized management as its top priority, using the hybrid PoW / PoS mechanism.
- The NEO project, often called the Chinese Ethereum, also offers its users the possibility of staking.
- Zcoin (ZCX) is oriented to increased user privacy and gives favorable staking conditions (17% per annum).
- Tezos, which uses the Liquid Proof of Stake algorithm and is positioned as the network protocol for safe and time-tested smart contract systems.
Also, Ethereum (ETH) — one of the most popular currencies in the world, will soon switch to PoS too. Ethereum has a unique algorithm for finding consensus among all cryptocurrencies. It combines two ways: the network began functioning from the classic Proof-of-Work, through a series of hard forks, is gradually moving to the Proof-of-Stake.
Don’t forget about the market’s volatility, check the comparison table.
What about Risks?
I always insist that “Safety — First”: the most important and easiest thing you can do to ensure the account’s security is to set up 2FA, use only trusted software, and not to disclose any personal information to third parties.
When users protect their wallets properly, cryptocurrency placement does not pose any significant risks. The greatest risk is manifested by the price volatility, which will always harm your wallet if momentum runs out.
Many cryptocurrencies set limits on the number of coins on a wallet. Therefore, users are forced to unite in “pools” with the subsequent division of earnings, which creates some additional difficulties.
Also, the risk of centralization is quite high — when the bulk of the assets are in the hands of large players. This is especially true for young cryptocurrencies that have appeared recently and are traded at a relatively low price.
Due to the fact that users strive to keep coins on their accounts for as long as possible in order to maximize profits, there is a very high risk of a decrease in cryptocurrency turnover.
For those who rely on third-party services, there will always be a factor of trust. When it comes to trusting strangers on the Internet, the risk is always higher than when you do everything on your own.