Staking: Pros and Cons of Proof of Stake (PoS) as a Passive Income Tool

Apr 24, 2020 1
Staking: Pros and Cons of Proof of Stake (PoS) as a Passive Income Tool

All cryptocurrency assets can be divided into 2 types based on their operating principle: Proof of Work (PoW) and Proof of Stake (PoS).

The concept of Proof of Stake (PoS) involves a type of mining, where instead of the computing power of the participants, you just need to store crypto assets in your account. So, instead of using large amounts of electricity, the percentage of possible transaction checks is limited for PoS participants. It is logical that the more coins the miner has, the stronger his/her capabilities (the number of restrictions is higher).

The principle of Proof of Work (PoW) is completely different - users use the power of their computer and receive coins as a reward. Thus, confirmation of PoW transactions occurs.

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Also, do not forget about coins that satisfy both PoW and PoS conditions. Thus, there are 3 possible options:

1. The use of PoS coins that were previously mined and then sold during the IPO;

2. Using PoW and PoS hybrids;

3. Using PoW as a distribution method (up to a point).

A closer look at the Proof of Stake (PoS) system

Instead of directing users' energy resources to transaction processing, in the case of PoS, transaction node operators use their coins as insurance. Users using their Staking assets are rewarded as new coins for all successfully completed transactions. It can't be easier! Store coins in a wallet with access to the Internet 24/7 and get rewards for it.

The staking process itself is very similar to the principle of bank deposits, where the fee depends on the duration of the deposit. But, unlike deposits in the actual bank, Coin Staking in no way can lead to a negative percentage or any additional fees and charges.

Why use Proof of Stake (PoS)?

Choose a suitable asset, store it in a wallet with continuous access to the Internet 24/7, make sure that the coin supports the PoS principle. The biggest and almost the only drawback of this system is the need to connect the wallet to the Internet.

Great news for beginners and those who don’t like to “burden themselves” with complex technologies - to successfully use Staking and receive rewards, you do not need to understand all the intricacies of Proof of Stake.

Is Staking beneficial as the only way to make money?

Of course, the concept of receiving rewards only for storing cryptocurrency looks attractive enough, but, unfortunately, you should not expect significant profits. In most cases, rewards for a hold are less than regular rewards for blocks issued by the network.

It is also worth noting that the “bonus” is distributed among all coin holders. For example, if user X has 1% of all issued coins, then he/she is entitled to 1% of the reward received when a new block is discovered. This is a very basic description, but it shows the general principle of the PoS algorithm.

Remuneration for Staking can bring different passive income in different cases since the value of the asset is of great importance. No one will argue with the fact that every dollar you earned by storing coins without any additional movements is easy money, especially in the world of cryptocurrencies. Typically, users earn a few percents of their staking balance over the course of a year.

The main advantages of using:

The main difference between PoW in the formation of a block that occurs randomly. In the case of PoW, miners use expensive equipment that selects a single true number (nonce) to find a new block. And the more powerful the device’s hashrate, the higher the miner's reward.

Staking can rightfully be considered a convenient and less expensive way to make money on cryptocurrency than mining through PoW. Staking is also known for its high level of security, given the 51% vulnerability to attacks due to the fact that network members must compete with each other and maintain a certain level of coins in their wallets.

The most popular coins for staking:

  • Dash is one of the first cryptocurrencies to implement the Staking mechanism.
  • Decred (DCR) - Insists that decentralized management is a top priority. The coin uses a hybrid PoW / PoS mechanism
  • The NEO project, now known as “Chinese Ethereum,” also provides Staking capabilities.
  • Zcoin (ZCX) is aimed at increasing user privacy and offers very favorable conditions (up to 17% per annum).
  • Tezos uses the Liquid Proof of Stake algorithm and is positioned as a network protocol for safe and time-tested smart contract systems.

There are some talks that one of the most famous cryptocurrencies in the world Ethereum (ETH) will soon also switch to PoS. The coin has a unique consensus search algorithm among all cryptocurrencies. Initially, the Ethereum network began to function through the classic Proof-of-Work, gradually moving to Proof-of-Stake through a series of hard forks.

The risks

Security is above all!” And the most important, as well as the easiest thing you can do to protect your assets is to establish two-factor protection of your account and the mail used to register it, use only proven software (if you not familiar with the site - be sure to read reviews on the Internet) and most importantly - do not share personal information with third parties.

Using cryptocurrencies does not entail significant risks if the user protects his/her wallet and account properly. The greatest risk is associated with price volatility, which can harm your wallet if the momentum runs out.

Many cryptocurrencies set limits on the number of coins in the wallet. In this case, users are combined into "pools" with the subsequent sharing of income, which creates additional difficulties for traders.

The risk of centralization is very high when the bulk of the assets are in the hands of large players. A similar situation is most likely for “young” cryptocurrencies, which are traded at a relatively low price.

Due to the fact that users tend to keep coins on their accounts for as long as possible in order to maximize possible profits, there is a very high risk of reducing the cryptocurrency turnover in general.

And for users who rely on third-party services, the trust factor is always relevant. It's no secret that when it comes to trusting strangers on the Internet, the risk is always much higher than in the case of independent work.

A few important points to consider when choosing a crypto platform:

  • Reputation - reputation is an important point that embodies the brand as a whole.
  • Security is protection, although the second, but no less important way to determine the right platform, since it is important for everyone to know that money is safe.
  • Commissions - commissions vary depending on the platform you choose, some exchanges charge a fee for each transaction of trade, deposit or withdrawal, some have special offers without extra charges. The choice of platform depends on which trader you are.
  • Payment methods - each platform has different supported payment instruments, conduct your own analysis, and find out what suits you best.
  • User verification and geographic restrictions also matter. Read this information before registering.
  • Support - the best platforms offer multilingual technical support 24/7.


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The opinions and assessments expressed in the text are the views of the author of the article and may not represent the position of Cryptogeek. Do not forget that investing in cryptocurrencies and trading on the exchange is associated with risk. Before making decisions, be sure to do your own research on the market and the products you are interested in.

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