One of the most common ways for cryptocurrency investors to earn a passive income is by “staking” coins to help secure the network in return for rewards.
Staking refers to the process of locking tokens up to secure a blockchain network and confirm transactions.
During the time those tokens are locked up, users won’t be able to spend them, but in return, they’ll receive a reward, usually of the same cryptocurrency, as compensation.
Staking is only available with cryptocurrencies that use a Proof-of-Stake consensus algorithm to process transactions. PoS, as it’s often referred to, is an alternative to the original Proof-of-Work model that’s used by Bitcoin and some other cryptocurrencies.
Notably, it’s far more energy-efficient than PoW, which relies on miners using massive amounts of computing power to solve mathematical problems to process transactions.
For many crypto investors, especially those who have a large number of assets they intend to hold, staking can be an excellent way of generating some additional income.
How Does Staking Work?
It’s actually pretty simple. The most important requirement is to acquire assets that can actually be staked, which means the native tokens of PoS blockchains such as Ethereum, Tezos, Cardano, Polkadot, or Solana, to name just a few.
Participants will need to download an appropriate wallet that allows staking, such as MetaMask, or alternatively use the staking feature on select cryptocurrency exchanges that support it. Binance, Coinbase, and Kraken are a few examples of exchanges that allow staking.
The next step is for users to select how many coins they wish to pledge to the protocol – note that most wallets and exchanges will specify a minimum amount of tokens that must be staked.
From all of the staking participants, the protocol will choose validators at random to confirm blocks of new transactions.
The chances of being chosen as a validator are proportional to the number of tokens staked, so, in other words, the more tokens staked, the higher the chance of being selected.
Each time a new block is processed and added to the blockchain, the protocol will mint new tokens that are distributed as “staking rewards” to the validator of that block.
When tokens are staked they remain in the owner’s possession. However, staking generally comes with a “vesting period”, during which time those tokens cannot be transferred to another wallet.
So it means users won’t be able to trade those tokens until the vesting period expires, which may be a drawback during highly volatile market periods. The length of vesting period will depend on the exact token being staked.
While staking is open to anyone who owns the right cryptocurrency tokens, a fairly substantial minimum investment is required to become a full validator. In the case of Ethereum for example, a minimum of 32 ETH ($99,200 at the time of writing) is required.
Luckily, there is a simpler way to participate. Most exchanges and wallets provide the option to contribute to what’s known as a “staking pool”, where users pool together their crypto to reach the minimum investment.
Whatever rewards are earned are split proportionality among all of the participants of that staking pool.
The only real disadvantage to staking is that it’s only available for a few types of cryptocurrency. For PoW-based cryptocurrencies like Bitcoin, staking isn’t an option. But that doesn’t mean it’s not possible to earn BTC by staking another kind of token.
Stacking STX To Earn BTC
The possibility of earning BTC is a unique characteristic of the Stacks blockchain. Unlike other networks, Stacks offers a twist on the staking concept that derives from its novel Proof-of-Transfer (PoX) consensus.
Stacks is unusual because of its closely intertwined relationship with Bitcoin. Stacks is designed to enhance the capabilities of Bitcoin by building atop of it. It’s a Layer-1 blockchain with its own nodes, network, and miners as well as its own cryptocurrency STX.
However, it uses Bitcoin’s blockchain as its base layer, relying on both its storage and its broadcast medium. In other words, everything that happens on the Stacks blockchain (all of its transactions) is recorded onto the Bitcoin blockchain too.
As such, all Stacks transactions are ultimately settled on Bitcoin. To create a new block on Stacks, a Bitcoin transaction must be initiated on the Bitcoin blockchain.
This transaction involves Stacks miners sending a specific amount of BTC to a specified wallet address, and is the basis of Stack’s PoX consensus mechanism, recording the hash of each Stacks’s block on Bitcoin itself.
By doing this, Stacks benefits from Bitcoin’s strong security, while decentralized applications built on Stacks also get to use Bitcoin’s stake, despite being hosted on a different network.
It’s the unique PoX consensus that enables what’s known as “Stacking”. Stacking is where STX holders essentially stake their coins to facilitate Stack’s consensus, earning rewards in BTC for doing so.
To understand how Stacking works, we need to explain the PoX consensus. With PoX, miners are required to spend BTC in order to become a validator and win the next reward for each Stacks block.
The winning miner will be selected at random, though the more BTC spend the higher their chances of winning will be.
Stacks’ miners are rewarded in newly minted STX, while the BTC they spend is distributed among Stackers.
Stackers are required to lock up their STX for a minimum number of “cycles”, which last for around two weeks and see exactly 2,100 blocks processed.
It’s important to note there’s a fairly complex algorithm that runs in the background to ensure that miners don’t spend more BTC than what they earn in STX.
This algorithm ensures that only two Stackers per block processed actually get to receive BTC rewards.
What this means is that a maximum of 4,000 Stackers will earn rewards per cycle. Due to this limitation, Stackers are required to Stack a minimum number of STX per cycle, which is currently around 130,000 STX (around $150K).
If that seems expensive, don’t worry. Just as with regular staking, it’s possible to Stack STX in pools to participate with a much smaller amount of tokens.
At present, the only option for doing so is on the OkCoin exchange, which offers “collective Stacking”. However, both Boom Wallet and Xverse Wallet are said to be planning to add Stacking pools in the future, providing more options for would-be Stackers to earn BTC.
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