For a few weeks now, we have been receiving an increasing number of questions about staking from our community. This blog article is intended to help you gain an initial overview of staking, weigh up the opportunities and risks, and give you an outlook on what to expect when staking with BISON in the upcoming year.
The difference between Proof-of-Work and Proof-of-Stake
In addition to Proof-of-Work (PoW), which is the foundation for cryptocurrencies like Bitcoin or Litecoin, Proof-of-Stake (PoS) offers an alternative mechanism for achieving consensus within a blockchain. As of 2022, Ethereum has transitioned from Proof-of-Work to Proof-of-Stake. Using ETH as an example, the table below highlights the differences between the two consensus methods:
| Proof-of-Work | Proof-of-Stake | |
|---|---|---|
|
Achieving Consensus |
|
|
|
Energy Efficiency |
|
|
|
Dezentralization |
|
|
|
Security |
|
|
|
Scalability |
|
|
What is staking?
Staking is a process in the realm of cryptocurrencies where cryptocurrency holders provide (or “stake”) their coins to the protocol in order to support network security and transaction processing functions. Staking is an operation based on the Proof-of-Stake consensus mechanism (see table above).
💡 Terminology: Staking
Staking means holding and locking cryptocurrency units in a blockchain to validate transactions and receive rewards in the form of additional cryptocurrency units.
How does staking work?
Participating in staking not only aids in achieving consensus but also contributes to securing the network’s stability. In this process, cryptocurrency assets are deposited, temporarily blocked for transactions, and used to attain a consensus. This consensus ensures the network’s integrity by verifying the legitimacy of every new transaction before it’s added to the blockchain. Those who participate by staking are typically known as “validators”. In recognition of their contribution and for committing their digital assets, validators receive additional coins of that particular cryptocurrency, often referred to as “staking rewards”.
💡 Terminology: Staking rewards
“Staking rewards” refer to the rewards participants earn in the form of additional cryptocurrency units for committing their coins to a blockchain for validation purposes.
How can I get started with staking?
To successfully operate a validation node, you need to be connected to a specific blockchain and ensure a secure, continuously available infrastructure. Some blockchains even require a lock-up period, meaning the staked coins remain immobile for a certain duration. There might also be minimum requirements concerning the amount of coins that need to be staked. So, being a validator demands both technical know-how and a substantial financial commitment.
Because of these intricacies, many cryptocurrency enthusiasts opt to stake via a crypto trading platform. These exchanges streamline the staking process using their in-house validators and pool resources from various participants. The trading platform essentially handles all the heavy lifting. It’s worth noting that each PoS-based blockchain has its own unique rules for validators. These guidelines detail the technical and financial criteria to become a validator. The rewards that a validator garners usually hinge on various factors, like their active participation in consensus processes and the total volume of staked coins.
💡 Understanding common entry barriers to staking (with Ethereum as an example)
If you’re interested in staking on your own, be aware that participating requires a minimum commitment of 32 ETH. Ethereum’s protocol also introduces wait times. The duration of these wait times can vary based on factors such as the number of validators looking to stake or unstake their ETH at a given moment.
What are the advantages of staking through a crypto trading platform?
Crypto trading platforms offer users a seamless and secure gateway into the realm of staking. Let’s delve into the primary benefits of this approach:
- Lower entry barriers: The requirement of e.g. at least 32 ETH is distributed among the large number of interested customers and can thus be achieved more easily. The waiting time for participation is also reduced with this form of staking. This is made possible on the customer side by staking with freely selectable smallest contributions and immediate participation and generation of rewards.
- Simplified participation: Customers do not need additional software or hardware to participate in staking. In addition, no expertise is required to set up and monitor the validator technology. The configuration and automated monitoring of the staking is handled by the crypto trading platform.
- Mitigated risk: Possible risks from accidental protocol violations are minimized with this form of staking and can be covered by special insurance policies provided by the crypto trading platform.
What opportunities and risks are associated with staking?
In this section, we’ll delve into the opportunities and risks presented by staking, providing a deeper understanding of key aspects:
- Generating passive income: One of the primary draws of staking is the potential to generate passive income. By holding cryptocurrencies in a network and getting rewarded for their validation and security, investors can earn without engaging in active trading. This becomes particularly appealing for those with a long-term investment mindset who wish to benefit from potential rewards without the need to constantly monitor market dynamics.
- Slashing: Ensuring integrity, stability, and security is paramount in the Proof-of-Stake mechanism. To counteract potential malicious actors looking to exploit the system, the protocol incorporates a safeguard known as “Slashing”. Through this measure, a validator might lose a portion or even all of their staked ETH if they act against the network’s best interests. Special insurance policies protect against slashing, which is caused by unintentional breaches, but which the network considers to be a malicious attack. Think of it like liability insurance. If you damage an object (e.g. a vase) that belongs to someone else, the damage is not malicious and is insured.
- Potential losses:
When cryptocurrencies are staked, they are often inaccessible for a period of time, which can increase the risk of loss due to hacks or technical problems with the platform. In addition, during the staking period, the value of staked cryptocurrencies might decrease due to market fluctuations. Given that the coins are inaccessible during this time, immediate actions, like selling, aren’t feasible, furthering the risk.
💡 How can staking risks be mitigated?
Mitigating the risks associated with staking primarily revolves around choosing a trustworthy provider, one that offers integrated insurance within their staking service. At BISON, our utmost priority is ensuring the security of our customers. Before introducing any new products, features, or services, we conduct meticulous evaluations to ensure we offer only the most reliable solutions to the market. Regulatory compliance, safety, and quality are always our paramount concerns, even above considerations like rapid market entry. We made a conscious decision to introduce a staking product only after we secured relevant insurance coverage. As a member of Boerse Stuttgart Group, we adhere to the highest standards to safeguard your assets.
Staking with BISON: What’s in store for the coming year?
We are currently building our staking infrastructure, all with the goal to enrich our customers’ experience. Our mission? To introduce a staking product that is not only secure and reliable but also straightforward for users. Here’s a sneak peek of the benefits of staking with BISON:
- No waiting period
BISON eliminates the waiting game. As soon as you’re on board, you can dive right into staking. - Low minimums
The common entry barrier of staking – particularly the 32 ETH minimum – won’t hold you back here. At BISON, even modest amounts are welcome for staking. - Renowned partners
In building the staking infrastructure, we are relying on well-known partners based in Germany. Our collaboration with industry stalwarts like Munich Re and the renowned German provider, Staking Facilities, ensures you’re in good hands.
- Secure custody
The custody of our customers’ cryptocurrencies acquired at BISON is taken over in trust by Boerse Stuttgart Digital Custody GmbH, a subsidiary of Boerse Stuttgart Group in Germany, which holds the BaFin license for crypto custody. For this purpose, a multi-level security concept has been implemented at Boerse Stuttgart Digital Custody GmbH. In addition, the information security management system is certified according to ISO 27001. BISON customers’ staked coins always remain in our fiduciary custody. In addition, we have been successfully working with Munich Re since 2022 in the area of insurance for the customer assets we hold in trust. The insurance includes crime insurance, which insures the coins held in custody against thefts and cyberattacks, encompassing hot, warm, and cold wallets. - Insured Staking
Munich Re has also developed slashing insurance for our future staking offering to cover what is probably the biggest risk in staking. Slashing insurance protects against damage that may be caused by unintentional breaches, but which the network considers to be a malicious attack.
Staking on BISON is scheduled to be released in the first half of 2024 – we’ll keep you updated through BISON channels as soon as staking becomes available!
