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There are two different ways to mint new coins and tokens on blockchain platforms:
PoS provides an interesting way to earn a portion of those newly minted coins/tokens. Known as staking crypto, it allows you to become part of the validating process by staking your crypto to a validator.
Validators are responsible for, not surprisingly, validating transactions on the network. They’re also responsible for keeping the network secure.
In return, validators earn coins/tokens as a reward for maintaining the network.
Sounds like a lucrative gig, doesn’t it. Buy a few computer systems and start validating transactions.
If it was that easy, every scammer in the crypto world would become a validator, creating fake transactions just to earn crypto.
To avoid that problem, PoS requires that each validator have some “skin in the game” before being allowed to operate on the network. Each network has a minimum staking requirement.
For example, to validate transactions on Ethereum 2.0, the PoS system that’s going to replace the current PoW method of Ethereum, a validator must stake at least 32 ETH.
At current prices, that’s about $80,000 USD.
The more collateral, called a stake, a validator has, the greater the chance that operator has of processing the next block of transactions. So investing almost $80K in ETH as a validator probably isn’t enough to have a chance at the next block.
Many tokens have validators with millions of staked tokens (depending on the token price, of course). That can easily run to $1 million dollars or more, all for the right to earn more.
And those millions of tokens are always at risk. If the validator misbehaves or hurts the network, the network can “slash” them. This results in a loss of some or all of their stake.
For these two reasons — number of tokens required and the risk — validators accept tokens from users.
Validators prefer to spread their risk, and the opportunity, by allowing token holders to delegate their assets. This delegation, or staking, of crypto earns a proportionate share of the tokens the validator receives.
That proportion is stated as a percentage, which is usually in the 5% (low) to 15% per year range. Some newer PoS blockchains offer much higher rates to persuade people to stake tokens on the network.
Those high rates (some are in the hundreds of percent) usually go down as the network grows and more tokens are staked.
So it can pay to get in early, although you then run the risk of the project folding or running into trouble, such as a lack of liquidity.
Rewards you earn from staking crypto are paid in the token itself, which you can then stake. This starts the compounding effect.
Or you can convert them to another coin or token, or convert them to fiat money and send the funds to a bank account.
To avoid people jumping in and out of staking pools, many projects have a staking period, often called an epoch, during which your tokens are locked.
At the end of that epoch, the network releases the staked tokens.
You’re free to stake them for another epoch, or simply hold them, or convert them to another coin/token.
A few PoS systems allow you to remove your tokens before the epoch is over. But you’ll lose the reward tokens you accrued up to that point.
Some tokens let you stake for a preset number of epochs. For example, you can stake tokens built on the Stacks protocol, including the STX token itself, for one Stacking cycle of 15 days, or 12 cycles (180 days).
There are hundreds of blockchains using the PoS validation system. So how do you choose which one(s) to invest in?
There are five criteria you can use to evaluate them:
If the other four criteria were equal for all PoS networks, the one with the highest yield would be the one to choose. Who wouldn’t want to earn more money every year?
They’re not all equal though, so you have to balance the yield you can earn with, in particular, the risks involved.
A new platform will have a small market capitalization, which means that there are few coins/tokens out there, or that the price is low (often less than one cent). More often, it’s a combination of the two.
The larger the market cap, the more likely the network will stick around.
High levels of tokens staked on the blockchain indicate that the market has confidence in the project and the token. So look for a token that has a lot staked already.
There are two types of risks. The first is the risk of a “rug pull.” How likely is it that the project is a scam?
The market cap and the total staked (discussed above) are directly related to this. The more staked, the less likely you’ll have the rug pulled out from under you.
If you stick to projects where there are a lot of tokens already staked, you’ll avoid the rug pull risk.
The other type of risk to look at when staking crypto is how much your financial involvement is affected by price volatility, liquidity, and regulatory concerns.
If the price is regularly rising and dropping by tens of percentage points, getting in or out at the wrong time can be costly.
If you can’t convert your staked tokens and your earnings to another coin/token because there aren’t enough, you’re stuck with those tokens until the liquidity improves.
And if it’s likely that governments (particularly the U.S. government) will take issue with the project’s purpose or how it designed its tokenomics (token ecomonics), you could end up with a worthless token.
Some networks make you jump through several hoops to stake crypto on them. Others make it simple.
All involve buying coins or tokens, sending them to a wallet that’s compatible with the network (often the project’s own wallet), choosing a validator, then delegating your assets to that validator.
Also look at how easy it is to unstake your tokens. Some networks have long cycles or epochs, during which you can’t cash out.
Others have a “cooling off” period after you unstake your tokens before the network hands back your assets. This can be as long as 15 days.
If the project has a valuable use case, then the token is more valuable. For example, the Livepeer project is a decentralized video streaming network.
This means that, instead of a centralized network, like YouTube, streaming videos, thousands of computers host the videos and stream them. The owners of those computers receive LPT tokens in exchange.
That makes the Livepeer token valuable as a staking option.
If you’re looking to earn an income on the crypto assets you hold (or plan to hold), the simplest way to do it is to place your coins and tokens on a rewards platform.
You might not earn as much as you would by staking crypto to a validator, but you’ll have fewer headaches.
My preferred rewards platform is Freeway. Its current base rate is 20%, going as high as 43%.
That’s well over 200% to 430% more compared to what you’ll earn in a bank savings account.
Click here to learn more about Freeway. You’ll quickly see how much easier it is to earn than staking crypto on various platforms. You’ll earn interest daily, and those payments will be reinvested for you automatically.