Aug 22, 2020 13:21 UTC
Aug 22, 2020 at 13:21 UTC
Offline Staking, Explained
- What is offline staking?
- What are the benefits of offline staking?
- What are the risks of offline staking?
- How does offline staking work?
- Are there any instances of projects offering offline staking?
Offline staking: Explained
Offline staking permits users to stake their cryptocurrency in an offline wallet & earn staking rewards for doing so. An offline wallet is correspondingly known as a hardware wallet or a cold storage wallet, meaning it is not connected to the internet. Staking rewards offer users a chance to earn interest on their cryptocurrencies. They don’t necessarily have to operate a validating node under the proof-of-stake consensus model, as will be the case with Ethereum 2.0 staking. It is possible to stake offline against alternative specific who does operate a node & still earn the rewards.
Offline staking operates differently compared to established delegated staking models, which usually require the holder to delegate their cryptocurrency to a select group of validators. Anybody can become a “Super Staker” & stake for their friends without stirring their coins. For those that select to run a super staking node, offline staking grants additional unique opportunity: The ability to crowdsource delegations & earn a fee paid directly from the block reward.
Benefits of offline staking?
There are more than a few benefits to offline staking. It permits holders to choose to stake their cryptocurrency to a node operator instead of experiencing all the technical necessities of setting up a node themselves. Barriers to contribution are additional reduced because users are not essential to hand over custody of their funds to an external party. They can merely stake them using an existing offline storage wallet such as those manufactured by Trezor or Ledger. The only obligation would be that the wallet provisions the staking delegation function.
Offline staking profits the overall cryptocurrency platform ecosystem because it means that the token can become dispersed over a more extensive base of users who want to enjoy the profits of offline staking. In try, this reduces the dependency of token price on whales, which can extremely destabilize the value of a token by dumping them on exchanges. It correspondingly means that voter concentration is distributed over many more users, eliminating the likelihood that whales can exert influence over the network as well as token price. Furthermore, users who participate in staking are more likely to feel a closer affiliation to that network because they have invested in it & are being salaried for their efforts. This consequences in a stronger community around the token.
Offline staking likewise eliminates many of the risks associated with other interest-earning practices in cryptocurrency. For instance, the emergence of decentralized finance has seen users becoming incentivized to engage in “yield farming” through staking & lending platforms. Nevertheless, due to a lack of maturity in the DeFi market, its users can face momentous risks. One danger is smart contract bugs, which have turn out to be more prevalent this year with the augmented interest in DeFi. A hacker subjugated a vulnerability in the bZx flash loan protocol last year, & a smart contract bug was discovered on Bancor in June. Vitalik Buterin has said he has faith in users to continue to underestimate the risks inherent to blockchain-based smart contracts.
The Risks of offline staking?
Offline staking originates with a far smaller amount of risks than online staking or using DeFi borrowing or lending apps. With offline staking, there are no long token lockups & no slashing risks; it’s very user friendly. Consequently, the main risks are merely those extensive deliberations related to using cryptocurrency in hard wallets. Users need to confirm they keep their hardware wallet safe from theft & have appropriately secured backups of their keys. If they lose the backup & the wallet, they lose the funds entirely in the wallet, counting the staked ones.
Correspondingly, if users keep the hardware wallet passwords or access codes somewhere where a malicious third-party can access them collected with the hardware, they risk losing their funds. Overall, offline storage is measured to be among the safest means of storing & receiving a reward for holding cryptocurrency.
How does offline staking work?
There are several ways to engage in offline staking. As with any public proof-of-stake blockchain, a user can decide to participate in the network as a validator, called a “Super Staker,” or delegate to a validator. In the Super Staker case, a node accepts delegated stakes from other token holders. If some users don’t want to run a node, the alternative is to stake their tokens to an address that they then delegate to a Super Staker or a larger pool staker.
This can be configured via the user interface of the staking network, using the wallet address of their offline wallet. Whichever option the user chooses, they can earn their staking rewards & have them deposited to their wallet address. This means they continue to reap all the benefits of offline staking without risking taking their funds online at any time.
Are there any examples of projects offering offline staking?
Unfortunately, it’s still the case that most staking, whether straight under a pure proof-of-stake model or indirectly using a delegated proof-of-stake consensus, is online. This frequently means handing control of your cryptocurrency to a third party or assigning it to a random service. Tezos (XTZ) would be the most comparable model to offline staking since its coins stay liquid & users can set up their own “baker,” or validator, but “bakers” are essential to hold at least 10,000 to become a delegate, which costs close to $40,000 at current values.
Qtum has also announced an offline staking solution, & while it is recommended to hold more than a few QTUM tokens to participate, there are no smallest necessities. Other projects that deliver the ease of delegated staking, like Cosmos, Kava & Polkadot, can also be considered as an offline staking solution, but these involve other risks such as slashing. Mostly, offline staking solutions may enable supporters of decentralized finance to earn a return on their holdings without exposing themselves to many of the risks inherent to smart contracts used by DeFi applications.