What is a Staking Wallet?

Staking in Proof of Stake cryptocurrencies is simply where a user buys coins, have them sit in a coin wallet for some time so they can earn some money, and that interest is eventually added to the wallet balance. The longer the time of sitting the coins in the wallet, the higher the rewards.

For instance, coins sitting for 3 months could earn 20 percent. The total (meaning the sum of the originally deposited coins, any coins added later and the interest) can then be allowed to sit for 6 months to earn 50 percent, while those sitting for 12 months could earn 100 percent. 

Ideally, or in technical terms, staking is the process that a cryptocurrency wallet uses to validate transactions in the network and award you with coins as rewards.

In the validation process during staking, a wallet checks transactions to ensure that the person sending coins actually owned the coins and has the right to transfer them before doing the transfer. Staking wallets work hand in hand with each other in a given crypto network in doing validation for each of the network transactions posted and a transaction is validated (or passes the validation process) if many of the cryptocurrency staking wallets agree that the transaction is valid.

Staking is what helps the digital currency network secure because a person cannot validate his or her own transactions using his or her wallet and the coins earned are the rewards wallets get for maintaining security of the network.

Why stake coins?

Staking is one way of earning some interest or profit from your coins. You simply deposit them into the wallet and sit them in your wallet and they earn money. It is a popular alternative among people who do not want to trade coins or mine coins with expensive software and hardware and the set up complexities. No complicated hardware or software is needed to stake coins -- just the specific coin wallet installed on the typical computer or run online. One computer can even run run several wallets.

You also avoid using high computational power and more electricity spent during mining. Lack of centralized mining pools means there are lesser chances of the network being maliciously attacked.  

This way, Proof of Stake replaced Proof of Work mining in generation of new blocks. 

Rewards resulting from staking

Different PoS coins have different parameters and rewards for staking. Some high stake coins can give rewards of up to 2000% per annum. In other words, you simply look for cryptos that allow you to stake coins and earn more rewards although there are other factors to consider when looking for a coin in which to invest.

First, for a weighted coin system of staking, coins start gathering weight whenever they arrive and sit in your wallet (calculated as amount of coins x the coin age). The coins begin to generate and add a Proof of Stake block to the blockchain. The coins begin to earn rewards, which is added to the wallet balance. The coins are returned to and aggregated in the wallet for compounding gains once they solve a block and receive a reward. However, the terms used in creation of a new block in staking are "minting" and "forging" rather than "mining."

In most cases, forgers take the transaction fees because in cryptocurrencies, all coins are usually created in the beginning and no new ones are created -- although new coins get created in some versions of PoS.         

The rewards are given to one chosen person in the network of staking wallets, per each duration, say every one minute or the time it takes to discover a single block since it is the block rewards that are then split. Cryptocurrencies use some methods of selecting this person:

For lottery-based systems, a person with most "lottery tickets" might have the highest chances of winning the award if it works by lottery. For instance, the lottery tickets could be the "Weighted Coin Age" of the winner or simply the weight. In this case, weight would be a non-linear product of coin age (age of your coins since they came into the wallet). The coin age is reset when coins are sent to another address or successfully stake.

The probability of winning is calculated by dividing the total amount of tickets (or the total weight) a wallet owns by the network weight (network weight is all the number of tickets available for the lottery in all the network wallets). Each ticket has an equal chance of winning and so a wallet is at higher chance if it has more tickets.

In other words, the more tickets you own, the quicker you can expect to win and this is your expected time until next reward.

For instance, if the total network weight is 6 billion tickets and your total ticket is 2 million, the expected time in minutes would be 6B/2M

Remember, coins stake in groups of coins which arrive in your wallet during a single transaction.

In a PoS, the weight is calculated as a product of total coins (stake) and the average of those coins. Weight is a linear product of coin age. In PoSV, the algorithm ensures that new coins gain weight quickly while old coins gain weight increasingly slowly.

In Peercoin for instance, coins that have been sitting in the wallet unspent for 30 days start to compete for the next block. Examples of coins using this method include More examples of staking coins: Bottlecaps, HoboNickels, HyperStake, Orbitcoin, Snowballs, Novacoin and Diamond

Apart from the coin age based method, some cryptocurrencies such as Nxt and BlackCoin use randomization to predict the following generator of the new block. The system looks for the lowest hash value in combination with the size of the stake. Therefore, each node predicts with reasonable accuracy the wallet account which wins the right to forge a block.

Some coins combine randomization with the concept of "coin age." The older and larger the sets of coins are, the higher the probability of signing a block. Once they sign a block, they start at zero coin age and have to sit for more 30 days on the minimum to be able to sign another block.

To ensure that very old or very large collections of stakes do not dominate the blockchain, the probability of finding the next block reaches a maximum after 90 days.

It is also possible to mine the coins that are staked too but you lock the coin for a given period and cannot sell them.

David Kariuki

David Kariuki likes to regard himself as a freelance tech journalist who has written and writes widely about a variety of tech issues that affect our society daily, including cryptocurrencies (see cryptomorrow.com and coinpedia.org); climate change (cleanleap.com), OpenSim and virtual reality (see hypergridbusiness.com). He is currently pursuing a MSc in Environmental Management at Open University. He does write here not to offer any investment advise but with the intention of informing audience, and articles in here are of his own opinion. Anyone willing to use any opinion here as advise to invest in crypto should obviously take own responsibility and accountability of their losses (or benefits) thereof. You can reach me at eqariu@gmail.com or david@cryptomorrow.com