As cryptocurrencies become more popular, investors are looking for ways to make their money work for them. There are various ways people can invest in cryptocurrencies, but one way that seems to be rising in popularity is staking or delegating. Staking and delegating can be confusing for beginners who may not know what these terms mean, so we’ll look at what this process entails below.
Staking is when you delegate or assign tokens to someone to stake for you and generate income with them until the process is finished. Delegating is similar to staking in the fact that it’s when you assign someone your tokens so they can stake them for you. However, there is a major difference between staking and delegating: It’s only recommended that you delegate if someone will stake your tokens for you indefinitely.
For example, suppose you want to stake your tokens on a platform that doesn’t grant rewards. In that case, you’ll need to delegate those tokens to a reliable person or company who will continue staking and generating income. If you can’t trust them with your delegated tokens, then they’re not someone you should delegate to.
You’ll usually get the income automatically deposited into your account. However, it’s important to note that this income doesn’t come without risk. For example, if the person or company you delegated to loses your stake or decreases their staking rewards for any reason, then you will not receive any income. You must choose a reliable person or company to delegate your funds or tokens with before doing so.
DPoS vs. PoS
DPoS stands for Delegated Proof of Stake, while Pos stands for Proof of Stake. In a DPoS system, users (called fillers) delegate their stake to one or more validators/stakers, who are responsible for verifying transactions.
DPoS is often described as a system where the most votes win over all. Users can vote on who they want to be their delegate by using an online voting system or staking tokens on the network.
In a PoS, delegates allocate block rewards proportionally like in a POW (Proof of Work). Users who hold tokens on the network are eligible to become delegates. In a POS system, delegates are chosen by other users through an election process.
In both systems, the users must have a certain amount of cryptocurrency in order to delegate it or stake it.
Many decentralized cryptocurrencies use a POS system, including:
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- NXT
- Ethereum/Ethereum Classic
- Factom/Nexus
- Dash Coin/Masternode (Master nodes)
- PIVX/Zerocoin (ZPIV), etc.
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There is another form of staking called masternodes, where you stake multiple tokens (usually between 1,000 and 10,000 tokens) to receive additional benefits beyond simple staking.
Masternode coins provide additional services to the network, including instant transactions, anonymity, and decentralized governance, and function as a backup payment method. For example, Dash has masternodes that allow for instant transactions, have increased privacy through X11 mining, and help with governance.
Masternode coins require a significant amount of initial investment to become a masternode.
When it comes to picking the highest return staking coins to invest in, you’ll want one with a high ROI (Return on Investment), one that is easy to stake and use, and finally, one that is affordable.
When you use the DPoS consensus algorithm, you’ll need 20% of the total coins to vote, and when using the pos algorithm, you’ll need only 10% of the total funds. The percentage of staking currency needed in a PoS is higher than in DPoS, so you’ll want to research which algorithm is best for you before investing.
DPoS cloud enables users to delegate to a validator through their masternode without buying masternodes. DPoS staking can be done by anyone who has dpos cloud masternodes, which are required for staking/delegating function. At present, DPoS staking is done with the DPoS coin (DPoS), but it’s possible that more coins can be used for staking in the future.
Advantages of the Proof of Stake System
The main advantage of the PoS system is that it provides the opportunity for new investors to enter the market without having to create a whole new cryptocurrency. It also allows for ongoing development and offers the users more flexibility in what they want to invest in.
The PoS system offers cheaper transactions because those who are staking will receive interest on their investment instead of paying transaction fees on other platforms such as Bank or Paypal.
Disadvantages of Proof of Stake System
The most significant disadvantage is that staking can be difficult and can impose high risks on an investor as they will have to stake their funds/tokens on a single validator/delegate.
You may not receive your ROI in some cases because the validator/delegate loses your stake. In some situations, you may eventually have to deal with losing any gains that have been generated.
Advantages of the Delegated Proof of Stake System
The main advantage of the DPoS system is that it allows for a more democratic and decentralized way of creating new cryptocurrencies.
Using a DPoS system, anyone with a smartphone can become a delegate, thus making it easier for new investors to enter the market. There’s no need for creating a whole new cryptocurrency and allowing only those who control the most staking power to mint new cryptocurrency.
The Delegated Proof of Stake (DPoS) system is also more favorable because it enables users to choose their delegates instead of being forced into one by the network itself through masternodes. This means that you’re in full control of your currency.
Disadvantages of the Delegated Proof of Stake
The main disadvantage is that you’ll need a significant amount of money to stake your funds to receive extra benefits. You’ll also be unable to trade or withdraw your funds or tokens because you won’t be able to use them if they are staking.
Risks of Staking
As with any investment, staking has its risks. here are some things you have to be aware of before you start staking:
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- The staker can lose your tokens:
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Some stakers can give your tokens to another staker if they buy at a lower price. If the new staker is losing, they can sell your tokens back to you. The increase in the price of the cryptocurrency significantly influences your profit because it’s used to calculate how much of your stake gets rewarded. You will get more coins when the price is low and fewer coins when prices are high. This increases the risk of losing any profits due to fluctuations in pricing for the cryptocurrency you hold.
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- The staking process does not work automatically:
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You need to keep track of your staking progress. The most common method is using a desktop wallet or online staking service that supports staking. You’ll need to keep track of the currency you are staking and the amount you have. Your staking wallet will tell you how many coins you can potentially receive for each block that is minted.
When you are not staking because you don’t have mature coins, the network will block your coins. You’ll need to wait until you have enough coins that can be staked before you can start gaining rewards.
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- Crypto is volatile:
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Staking is not guaranteed. The price of cryptocurrency can rise and fall. If you decide to sell your stake before the cryptocurrency reaches maturity, you might receive less profit than you had anticipated. You will not be able to sell it unless you’ve completed the staking cycle.
Final Words
Staking is when you assign someone else’s tokens so they can stake them on your behalf. At the same time, delegating is different because that person or company will be responsible for continuing the process to generate income for you until the platform expires or their profitability has dropped below what’s recommended.
Featured Image: Megapixl
