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Video lesson

Staking Passive Income

Secrets of Staking to Earn Passive Income

Staking has emerged as a stellar option for generating passive income within the cryptocurrency realm, bridging the gap between investment and active participation in network security. By locking up tokens, participants help maintain the integrity of blockchain networks while simultaneously earning rewards—truly a win-win situation! Understanding staking is essential because, not only does it enhance the overall security and efficiency of these networks, but it also provides you with a pathway to earn potential income. As you delve into this lesson, you’ll uncover the mechanics behind staking, its risks, and how it interlinks with the broader cryptocurrency ecosystem and its principles, particularly as part of the Crypto Is FIRE (CFIRE) training plan.

Core Concepts

Staking: The process of locking up your tokens in a blockchain network to help secure it and earn rewards. In traditional finance, this can be likened to locking up funds in a savings account, where funds are used to support the bank’s operations, and in return, you receive interest.
Consensus Mechanism: Methods by which a decentralized network, like a blockchain, comes to a collective agreement on the validity of transactions. For example, in traditional finance, a central authority manages account records, while in crypto, multiple nodes achieve consensus without one central authority.
Proof of Stake (PoS): A consensus mechanism where validators (participants who verify transactions) are chosen to create new blocks based on the number of tokens they hold and are willing to stake. This contrasts sharply with traditional proof of work systems that rely on energy-intensive mining procedures.
Validators: Participants in the network who are responsible for validating transactions and creating new blocks. In traditional finance, these would be akin to bank employees who oversee transaction approval.
Slashing: A penalty enforced on validators who act maliciously or negligently by losing part or all of their staked tokens. This is a stark contrast to traditional finance, where there are less direct personal penalties for wrongdoing on a corporate level.
Delegation: Allowing a third-party service to stake your tokens on your behalf, effectively outsourcing the technical aspects of staking. This mirrors traditional finance’s concept of asset management, where investors rely on professionals to manage their portfolios.
Locking Period: The timeframe during which staked tokens cannot be moved or traded. This concept aligns with traditional investment vehicles which may have lock-in periods to ensure stability and prevent rapid cash outs.

Understanding these concepts is vital as they lay the foundation for navigating not only staking but also the broader cryptocurrency landscape.

Key Steps

1. The Basics of Staking

Definition: Locking up tokens helps secure a blockchain while earning rewards.
Mechanism: Tokens are used as collateral for validators.
Benefits: Opportunities for passive income through staking rewards.

Staking is similar to placing your cash in a savings account but with a twist. Here, you’re actively contributing towards the security of a decentralized network while being rewarded for your contribution. This allure of passive income is compelling, especially in a world where traditional savings accounts yield minuscule interest rates.

2. The Role of Validators

Selection: Validators are chosen based on their staked amount.
Responsibilities: Validate transactions and secure the network.
Selection Process: Random, but higher stakes increase selection chances.

Think of validators as gatekeepers holding the keys to the treasury vault. The more tokens they stake, the higher their chances of being selected to unlock the next batch of transactions. This random selection mirrors lottery practices, where buying more tickets increases your odds of winning, albeit with no guarantee of success.

3. Understanding Risks

Delegation Risks: Choosing unreliable validators can lead to slashing if they underperform.
Market Risks: The value of staked tokens may decline while being locked up.

The risks of staking mimic those of any investment—choosing the wrong vehicle can lead to losses. Just like one must scrutinize banks for the best interest rates and reliability, similar due diligence is required for choosing a reliable staking platform.

4. Earnings Potential

Rewards: Tokens earned can increase your holdings.
Inflationary Nature: Oftentimes, newly staked tokens can lead to inflation of the token supply.

Earning staking rewards adds a layer of complexity to your crypto portfolio. For instance, staking Atom may allow you to accumulate tokens at an interest rate of around 18%. However, it’s crucial to note that while you may have more tokens, the overall value could diminish due to market fluctuations.

A Blockchain Perspective

Crypto Connection: The Mechanics Behind Staking

Staking in the blockchain world operates under an umbrella of decentralized consensus, ensuring the integrity of the system relies on multiple active participants. To put this into perspective, while traditional banks act as centralized authorities, staking creates a community-driven economy.

Examples: Tokens in Action

Taking a look at specific cryptocurrencies, Cosmos (ATOM) provides staking rewards upwards of 18%, reflecting how staking can generate significant returns. In contrast, Polkadot (DOT) offers incentives around 14%, demonstrating the diversity in potential returns across various platforms.

Real-World Applications

Historically, as cryptocurrency adoption has surged, staking has evolved into a prominent method of generating passive income. By participating in staking, not only are you contributing to the integrity of the blockchain, but you’re also placing yourself at the forefront of this financial revolution.

Challenges and Solutions

Mismanagement: Potential for token loss due to validator inaction.
Security Concerns: Reliance on third parties can create vulnerability.

Mitigating these risks often involves engaging in research on validators and platforms, much like conducting due diligence before any significant investment.

Key Takeaways

Staking provides passive income: Similar to interest earnings in traditional finance, staking rewards you for participating in blockchain maintenance.
Understanding validators is critical: Just like knowing the people managing your money at a bank, it’s important to understand the threats posed by malicious validators.
Awareness of risks is crucial: Token value can fluctuate; choose wisely where you lock your assets.
Delegation helps ease the burden: Outsourcing staking tasks can simplify your experience, akin to hiring a financial advisor.
Earning potential varies widely: Different tokens reward various staking percentages, meaning some investments may be more lucrative than others.

Discussion Questions and Scenarios

How can staking be compared to traditional savings accounts in terms of risks and rewards?
In what ways does the randomness of validator selection produce fairness in the cryptocurrency space?
If a validator is slashed due to negligence, how would that impact token price and overall confidence in staking?
Compare the mechanisms of PoS with traditional banking systems. What could each learn from the other?
Imagine a scenario where staking yields exceptionally high rewards for a short period. What factors should you consider before committing your tokens during that time?

Glossary

Staking: Locking tokens to earn rewards.
Consensus Mechanism: How networks achieve agreement on transaction validity.
Proof of Stake (PoS): A consensus method where validators are selected based on staked tokens.
Validators: Users who verify transactions.
Slashing: The penalty for malicious actions by validators.
Delegation: Allowing another party to stake your tokens for you.
Locking Period: Time frames when staked tokens cannot be accessed.

By understanding these concepts, you’re equipped with the knowledge to delve deeper into staking and further explore the crypto landscape. As you continue your journey with the Crypto Is FIRE training program, get ready to unlock even more interesting insights that the world of cryptocurrency has to offer!

Continue to Next Lesson

Ready to embrace the next chapter of your crypto education? Let’s dive deeper into the functionalities, potential, and ongoing evolution of cryptocurrencies in the upcoming lesson of your Crypto Is FIRE training program. Buckle up, because there’s so much more to discover!

Read Video Transcript

What is Staking in Crypto | Staking Explained Simply for Beginners

https://www.youtube.com/watch?v=hRLC6xIpIZY

Transcript:

Staking is a very popular way to earn passive income in the crypto space. So, what is staking? Well, the short answer is locking up some of your tokens to help secure a blockchain and earn interest on your tokens in return. You may be wondering, how does locking up some tokens secure a blockchain, and also, from where exactly does this interest come from? Well, we will answer these questions and more in this video.

Welcome to CryptoBee, where we explain cryptocurrencies and d5 topics in the most simple and beginner-friendly way in this video you will know what exactly is staking and how it actually works we will also talk about the risks of staking and at the end the top staking tokens right now and how much you can earn with them, so, let’s get started.

So, like what we have said, staking is locking up tokens to secure a blockchain and earn interest in return. But how does locking up tokens secure a blockchain? Well, to answer this question we need to get to something called a consensus mechanism. In our traditional centralized finance systems, a central authority like a bank, keeps records of all users’ accounts and their balances, and also verifies new transactions to make sure that no one is making fraudulent transactions or spending money he doesn’t have. So there’s just one version of these records,

and the bank only has the authority to modify, add, or delete from these records. But things are different in blockchains, as a blockchain is a decentralized network, so there is no authority keeping the correct records, there are just a lot of computers connected to the network, and each computer can have a different version of the user’s accounts and their transactions.

So the problem here is that how do we make sure that all computers have the same correct version, and also, how does the network choose which computer gets the right to verify and add new transactions to these records? That is where consensus mechanisms come into play. A consensus mechanism is the way all computers on the network agree on the correct version of the records and on who has the right to add the next group of transactions, which is called a block.

There are many consensus mechanisms, but they are out of the scope of this video. However, to explain staking, we need to explain a consensus mechanism called the proof of stake, which is pretty simple. In proof of stake, the computers that verify new blocks or groups of transactions are called validators.

To make sure that these validators will act honestly and will not do anything wrong or shady, like approving fraudulent transactions, they need to lock up a large amount of tokens as a collateral before being accepted to join the network. This locking up of tokens is what is known as staking and it helps securing the network by making sure that the validators are trustworthy.

If a validator does anything wrong or approves fraudulent transactions, are trustworthy if a validator does anything wrong or approves fraudulent transactions it gets punished by losing some or all of its stake tokens this is known as slashing on the other hand if the validator is working honestly and correctly to secure the network it gets rewarded by new tokens in return for its services these newly created tokens are the staking rewards and that is where your staking interest comes from.

A very important point here is that on most proof-of-stake blockchains, there is a minimum amount each validator needs to stake to be able to join the network. They can stake more if they want, but they can’t stake less than this minimum amount. Also, there is something called a locking period. Basically, when you stake your tokens, they get locked up on the network for a specific duration.

This duration depends on the blockchain rules, it could be 14 days, 21 days, a month, and sometimes even longer. During this period, you can’t do anything with your tokens, you can’t send them to anybody, and you can’t withdraw them. So, make sure that you will not need the tokens you are staking for a while.

So that was the general idea, let’s now get to how staking actually works, to see what happens when you stake your tokens. What happens is that for each new block or group of transactions, only one validator is selected by the network to verify these transactions, remove the bad ones and make sure that everything is okay then getting the reward which is newly created tokens in some blockchains the validator will also take the fees paid by users that made these transactions the newly created tokens as a reward for validators

basically tells us that most proof-of-stake tokens are inflationary which means that the total supply of the token increases each year, or as time goes by. If you have been enjoying the video so far, hit the like button, it really supports the channel. So, now you know that only the selected validator takes the reward, but the question here is, how does the network choose which validator has the right to verify the next block and take its reward? Well, most proof-of proof of stake blockchains select this validator randomly but the higher the amount of staked tokens by a validator the higher

the chance of getting selected by the network we know that this idea may be confusing but you can think of it like a draw but the more tokens you stake the more entries you get to this draw so if for example in this, you have 5 entries and all other validators have 3 entries each, then you have the highest chance of winning the draw, but that doesn’t mean you are guaranteed to win, the network can still choose any of the other validators. The idea here is that validators with very large stakes are more likely to act honestly,

as they have a lot of tokens they can lose compared to other validators with smaller stakes so after a validator is chosen it can now verify the transactions in the block and the other validators will check its work if everything is okay the validator gets the reward and then a new validator is chosen for the next block so now you know what is staking and how it works but an important point you should also know is that setting up a computer as a validator and connecting it to a network is not easy at all for most people as it is a complicated process and requires technical

knowledge even after you set it up the validator will need routine maintenance to make sure everything is working correctly so what if you want to stake your tokens, without doing all of this, or simply, you may not have the minimum amount needed, but still want to stake your tokens? Well, you can actually do that, by giving your tokens to a company, or to somebody who has the hardware and the knowledge to run a validator.

The validator will verify the transactions and earn the rewards, and you won’t have to take care of anything at all. But of course the company running the validator will take a commission or a percentage of the rewards you get. This is known as delegation, and this is actually what happens when you stake on exchanges and wallets like Coinbase, Trust Wallet, and Exodus.

They stake your tokens with the tokens of other users, run the validator, and earn a commission from the rewards you get. But they make the staking process very easy. Let’s now talk about the risks of staking. One of the risks of delegation is choosing a bad company or person to give him your tokens.

Sometimes the validator is not set up or maintained properly and can be offline for long times, which can result in slashing your tokens. Even worse than this, this company or person running the validator can take your tokens and disappear. So you should always choose trusted well-known companies to stake your tokens. Another risk of staking is the price of the token.

Remember when we said that the validator is rewarded with newly created tokens? That means that if you are staking Atom tokens, you will get the reward as Atom tokens. The risk here is that the price of the token may go down while your tokens are locked up.

So, although now you have more tokens, the worth of these tokens may be less than what you started with for example you may have staked 500 atom tokens when the price of atom was ten dollars per token so the total worth of your tokens was five thousand dollars let’s say you left them staked for a while and you earned some more atom tokens let’s say you now have 550 atom tokens but the thing is that the price have fallen to five dollars per atom which makes the total worth of your tokens, 2750 dollars.

So to avoid these losses, you should only stake tokens you think will go up in price and you are planning to hold for a long time. Before we end the video, let’s see the most popular staking tokens right now and how much you can earn currently. Keep in mind that these earnings change frequently.

So, we have, Cosmos, which gives you currently about 19% for running a validator yourself, and around 18% for delegating your Atom tokens. Next, we have Polkadot, which gives around 15% for running a validator, and 14% for delegating your DOT tokens. Another token is Elrond, which currently gives 13% for running a validator and around 12% for delegation.

We also have Avalanche, with 9% for running a validator and 8% for delegation. And finally, Solana, which gives around 6% for validators and around 5% for delegation.