Cosmos Proof of Stake
There has been an awful lot of chatter when it comes to the environmental aspect of energy usage when it comes to blockchain technology. Particularly when talking about Proof of Work (POW) chains such as Bitcoin and Ethereum that use enormous amounts of energy to sustain the integrity of the chain. Enter Proof of Stake (POS) chains that use significantly less energy and are fast overtaking the popularity of POW chains. This article won’t be talking about the technical side of the differences between POW and POS rather, this article will be focusing on the benefits of Staking on Cosmos POS chains for you, the investor.
How to Stake
If you read the previous article on Osmosis you would likely have set yourself up a Keplr wallet by now. Or perhaps a Cosmostation wallet? These tools will be essential to get started on your journey to becoming a delegator. It is highly recommend all cryptocurrency holders to keep their tokens in a non-custodial wallet such as the ones previously mentioned. Not only can you use your non-custodial wallet to hold your tokens safely, but the private keys to your tokens are then yours to own, as opposed to keeping your tokens on an exchange in which the ownership of the tokens private keys actually belongs to the exchange.
To stake your tokens simply click the staking button in your wallet of choice and it will take you to the staking interface. Once there choose the number of tokens you wish to stake and hit the stake button. Now your tokens are staked and you can start reaping the rewards.
There are many benefits to staking your Cosmos ecosystem tokens. First and foremost you are entering a community of people who truly believe in the concept of decentralization and are working towards bring this into the mainstream. Secondly you are helping to secure the network. POS networks rely on validators to validate transactions and by delegating your tokens (staking) to the validators you are giving the validators a) the power to vote on your behalf should you choose not to vote in governance proposals b) the more token delegated to a validator the more blocks they can validate. For this reason it is best to spread your delegations across a few validators to maintain the balance of power.
Rewards for Staking
In return for delegating your tokens to a validator you will be rewarded with tokens which are paid every block (an average of every 6-7 seconds for most Cosmos SDK chains). When you consider that staking is not too dissimilar to term deposits with a bank, except with staking the returns are significantly higher. The rewards for staking are based upon a combination of the current inflation rate of the token and the percentage of tokens bonded (staked). For example if you are to stake with the Cosmos (ATOM) token the rewards at the time of writing are 14.48% APR, Terra (LUNA) is 6.63%, Terra USD (UST) is 20.63%, Osmosis (OSMO) is 97.28%, Juno is 101.33% and Huahua is a whopping 567.19%. These rates are constantly variable and will go up and down depending on the volume of staked tokens and the occasional governance change to the inflation rate.
There is another positive aspect of staking Cosmos ecosystem tokens, which is the incredible volume of airdrops. When new projects are released they very often drop free tokens to stakers of other tokens within the ecosystem based upon snapshots that are taken periodically. This for many, has been an extremely lucrative part of staking as some of these tokens have gone on to become very valuable as the projects grow in popularity, liquidity and utility. Just be aware that for most airdrops, central exchange validators are excluded so make sure to delegate to a non-exchange validator and keep your tokens in your own custodial wallet.
Pros and Cons
There are some positives to staking such as high yield rewards for staking, securing the network, receiving airdrops and being able to vote on governance proposals but there are also some negative aspects. Firstly, once you have bonded your token to the network you can no longer access the token if you should want to sell it. It is locked up until you unbond the token and upon unbonding your rewards cease and your token is still locked for an unbonding period. Some chains this is 14 days, other 21 days and some are as high as 28 days unbonding period. This can feel like a long time and if you are planning to try selling the top or taking profits then your technical analysis has to be quite long sighted, as 14-28 days can feel like a long time in the fast-moving cryptocurrency space. There is one more negative aspect in that you must choose your validator wisely. To prevent validators from acting maliciously and to encourage them to stay online 24/7 validating transactions a slashing penalty is in place. Most validators will refund you any slashing should that occur however, DYOR as it is possible (although rare) that your funds could be slashed (a small portion taken as a fine), should your validator act maliciously or simply have a period of downtime.
In summary, staking has a lot of benefits, from gaining substantial staking rewards, receiving airdrops, securing the network, allowing you take part in governance and being a part of a thriving community, however, be vigilant in choosing your validators. Even though the risk of slashing is very small it is something to be aware of. As always, nothing in this article should be considered financial advice. Before making any decisions always do the due diligence and research thoroughly.
I’ll be deep diving into more chains and aspects of the Cosmos ecosystem over the coming weeks and months so subscribe if you haven’t already to keep up to date with everything Cosmos
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