Warren Buffet once famously said “Find a way to make money while you sleep otherwise you will work until you die“. Certain cryptocurrencies have given us the chance to earn passive income in the form of staking rewards. What exactly are staking rewards though and how does it all work?
When Bitcoin suddenly appeared in 2009 after being created by its mysterious inventor who went under the pseudonym, Satoshi Nakamoto, it unveiled a powerful new technology in the form of the blockchain. Blockchain in essence was the best ledger ever devised by mankind and completely decentralized the transfer of information and wealth. Anybody interacting on a blockchain can see in real time every transaction occurring, where it’s going and exactly what is being transferred without the need for a central authority. To secure a blockchain network, a consensus mechanism is needed which in the case of Bitcoin, a proof of work consensus model is used which is abbreviated to PoW. On the Bitcoin blockchain, millions of specialized computers called ASIC’s crunch numbers to solve an algorithmic puzzle every ten minutes which processes transactions and releases a block reward to the computers which cracked the puzzle. Blocks are created every ten minutes and the process goes on indefinitely. For a more detailed description on how the Bitcoin blockchain works, I found a great explanation here.
The Bitcoin blockchain grew rapidly from its inception in 2009 till today and there are now millions of ASIC’s, or as they are more commonly known “miners”. Unfortunately these miners consume a huge amount of power which has a negative impact on the environment. To combat this, a new consensus model was created called Proof of Stake or as it is more commonly abbreviated to PoS. In this consensus model, coin or token holders on the respective blockchain can stake their coins to secure the network and in turn are rewarded with more coins or tokens. Basically, the more tokens or coins a holder stakes, the more coins or tokens they are awarded as rewards for helping to secure the network.
Proof of stake blockchains have created a system where a coin holder can passively collect rewards for little effort on their part. To earn rewards, all a person has to do is buy the coins on a exchange, create a native wallet for that coin, stake the coins through the wallet and wait to collect the rewards.
Currently there are many coins in the cryptoverse which support staking. Some of the higher cap PoS coins available are Cardano, Algorand, Neo, Cosmos and Polkadot. It is important to note that Ethereum which currently has the second highest market cap behind Bitcoin will be switching to PoS sometime in the hopefully near future.
A comparison between dividends on stocks and staking rewards on Proof of Stake cryptocurrencies can be made. Investors in a stock that pays dividends are compensated with more stock on a set paid schedule as a reward for holding the stock and believing that the company will grow in the future. Investors in a proof of stake cryptocurrency are compensated with more coins of that crypto for believing the coin will appreciate over time. In both cases, investors are being paid to wait and are receiving a passive income for assuming the risk of the asset potentially dipping in value.
Proof of stake cryptocurrencies have opened up a new frontier for passive income and it is important for new investors to do thorough research on PoS coins before they commit to investing in them.
King of Stake 