Written by Logan Smith

On September 15, 2021

Understanding Cryptocurrency Staking

Staking is one of the most talked about – and most loved – parts of the broader cryptocurrency economy. To better understand this exciting way to use crypto, let’s take a closer look at what staking is and how staking works on Proton. If you’d like to skip ahead to a helpful guide about staking on Proton, just scroll to the bottom of this article.

Staking 101 – What is is and how it works

Staking involves depositing your cryptocurrency into a wallet or smart contract and earning interest on your deposit. Many people choose to stake their cryptocurrency because it allows them to earn more cryptocurrency simply for holding their crypto in a certain account – this is often seen as a way to put your money to work for you and earn extra income on the side.

Understanding the purpose of cryptocurrency staking requires that you first understand the fundamental differences between the two primary blockchain types: Proof-of-Work (PoW) and Proof-of-Stake (PoS).

PoW blockchains are the more traditional form of blockchain architecture – Bitcoin, for example, operates at a PoW blockchain. This type of blockchain relies on other computers to perform the task of “mining” in order to process transactions and add new blocks to the blockchain. This distributed method of transaction processing has been praised as being very decentralized, but has been criticized for being energy inefficient.

PoS blockchains are a sharp contrast to the PoW method of computing transactions. Within this framework, cryptocurrency holders lock their tokens into a smart contract, which is known as staking. Proton is an example of a type of PoS blockchain known as a delegated proof-of-stake, or DPoS. Here’s how that works:

Step 1: Blockchain projects apply to become a node operator on Proton, which are referred to as “block producers.”

Step 2: Users who want to stake their cryptocurrency select four block producers to stake their funds with.

Step 3: The block producers who receive the most votes in a given period of time receive a larger percentage of the block rewards for the transactions that were being processed at that time.

Step 4: A portion of the block rewards are passed on to the users who staked their cryptocurrency in the first place.

When staking your funds, you’ll be able to see the APY (Annual Percentage Yield – the amount of interest you receive on your deposit) before making a final decision. Some platforms offer variable APYs, while others offer fixed APYs; on Proton, we offer a variable APY. After you stake, you’ll automatically begin receiving interest on your deposit based on the schedule you signed up for – some platforms provide interest every 7 days, every 24 hours – on Proton, you will receive rewards every 24 hours.

Why do you get paid for staking your cryptocurrency?

This is a basic question, but it’s worth asking: why do you get paid to stake your cryptocurrency? To answer this, let’s briefly imagine a traditional savings account. Many financial institutions offer small amounts of interest – usually somewhere between 0.001% and 0.4% for keeping your cash in their system. They’ll often give you a tiny bit of interest as a “thank you” for choosing them as your institution.

Companies that offer staking services operate on similar, but different, principles when trying to incentivize users to stake their funds. Here are a few common reasons why a blockchain or cryptocurrency company may incorporate staking into its structure:

  • Lending staked funds. Some staking service providers may in fact loan your staked cryptocurrency to other people, though not all of them do. 
  • Proof-of-Stake blockchains. Some staking service providers operate on a Proof-of-Stake (PoS) blockchain, where blockchain transactions are validated by nodes, and holding more cryptocurrency within a node pushes that node up the priority list. Essentially, staking crypto with services using a PoS blockchain helps them get priority in a given blockchain.
  • More users. Some staking service providers simply want to see more users on their platform. By offering rewards for staked crypto, they can incentivize you to join their network and keep your funds under their management.
  • Energy efficiency. Proof-of-Stake blockchains are known to need far less energy than traditional Proof-of-Work blockchains, offering a way for transactions to be computed in a way that reduces the carbon footprint of that blockchain.

How to stake on Proton

Traditional staking on Proton is known as “short staking,” since interest is paid out quickly every 24 hours. We currently offer short staking for Proton (XPR) that is deposited into a short staking smart contract in your Proton wallet.

At Proton, we believe that everything you do with cryptocurrency should be reliable and easy. That’s why we’ve made short staking as easy as we possibly could. The process of staking your cryptocurrency with us is very simple, here’s how it works:

Step 1 – Create a Proton wallet account for free by downloading the Proton wallet app from the Apple App Store or Google Play Store.

Step 2 – Deposit your cryptocurrency into your Proton wallet account. See a helpful guide here for more information.

Step 2.1 – If you don’t have Proton (XPR) yet, you’ll need to swap whatever you’ve deposited for some. Don’t worry, there are no gas fees for making swaps on Proton – see our quick guide for swapping here.

Step 3 – Click on the Proton asset.

Step 4 – Tap on Short Stake

Step 5 – Select “Update Stake” and select the amount you’d like to stake.

Step 6 – You’re done! Now that you’re staked, you’ll be eligible to receive more XPR every 24 hours based on the current variable interest rate, which can change often.

As you can see, staking your cryptocurrency on Proton is about as easy as it gets. Powered by the Proton blockchain, everything you do in our ecosystem is instantaneous, verified by your unique @name, and without any gas fees at all. This means fast transactions, without paying ridiculous fees.

Ready to learn more about Proton? Check out our blog to see past articles, new updates, and everything else there is to know about the ecosystem we’re building. Be sure to follow us on social media to stay up to date on the latest happenings in our world.

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