What is staking in crypto?

| November 17, 2023

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Staking in Crypto

Staking is a prominent part of the Proof-Of-Stake consensus mechanism. It provides a reliable alternative to Proof-Of-Work consensus that defined how a blockchain adds a block and how it rewards the validators for those transactions. Plus, blockchains that rely on staking crypto mechanism help address some of the critical infrastructural issues associated with the older consensus mechanisms such as PoW. In the following sections, we explore all the concepts related to crypto staking in-depth.

Key Takeaways 

  • Staking helps keep the blockchain operational, confirm transactions, and ensure network security.
  • Crypto staking lets you earn rewards for holding onto a particular type of crypto token for a specific period.

What Is Staking?

Staking is depositing and locking up your cryptocurrencies for a determined period on a blockchain. The participants validating transactions earn block rewards for staking their funds. You can only stake your tokens on a blockchain network that relies on the Proof-of-Stake (PoS) consensus mechanism. The best crypto staking provides you with the opportunity to earn newly minted crypto coins as a reward for your staked coins.

How does staking work?

To better understand crypto staking, it’s essential to know how the PoS consensus mechanism functions. But, before that, it is critical to note that the PoS consensus mechanism differs from the Proof-of-Work (PoW) mechanism.

In the PoS mechanism, the participants are required to stake a certain amount of cryptocurrency as collateral. Later, the blockchain protocol opts for a participant based on the size of their fund holding and the net duration of their stake. Once chosen, the participant can append the latest transaction data to the block and receive rewards for staking crypto.

The rationale behind staking assets is fascinating. The staked collateral (deposited funds) safeguards ensure that transaction validators perform their operations in good faith towards the blockchain network.

There are penalties associated with violations of the network rules. If, in case, the validator commits minor protocol breaches, such as being offline for a significant period, they will face penalties from the network. On the other hand, if the validator validates invalid transactions, the blockchain network will burn a portion of its crypto stake. This process is also known as a slashing event.

What is Proof of Stake?

Proof of Stake (PoS) is an algorithmic consensus mechanism used by blockchain networks to validate transactions and add new blocks to the ongoing or mainchain.  Before understanding PoS, you are required to understand what PoW is. The PoW mechanism requires miners to perform complex mathematical computations to validate transactions and add new blocks to the main chain. This is not the case with PoS. PoS algorithm assigns the task of validating transactions and adding new blocks to nodes or participants based on their staked coins.  In PoS, the more a validator crypto stakes fund, the more likely they are to be picked by the algorithm to validate transactions. The participants are rewarded with transaction fees and newly minted cryptocurrency for their participation throughout the crypto staking and validation process. 

Energy Consumption 

In terms of energy efficiency, PoS outperforms PoW on every metric. PoW stands for proof of work, the consensus mechanism the Bitcoin network uses. Ethereum (ETH) and Solana (SOL) are among the best staking crypto protocols.  In a PoW system, miners require significant electricity to support computationally heavy tasks. They need to use a large amount of computational power to validate transactions. The entire validation process is environmentally harmful and costly. 

Security concerns 

Security and reward are among the few more advantages of Staking with the best crypto-staking platform. PoS mechanism makes it much more difficult for hackers and malicious actors to pull off a 51% attack on the network.   The most considerable risk associated with a consensus mechanism is the 51% attack. In a PoW, a miner with 51% of the network’s computational power could potentially take complete control of the infrastructure and manipulate blocks. On the other hand, with PoS, the hacker would need to acquire 51% of the network’s staked funds to get complete control over the infrastructure. This makes attacking a PoS-based network much more expensive in comparison to PoW.  

PoS’s Limitations 

There are risks of staking as well. PoS suffers from a “nothing-at-stake” problem. In PoS, validators have no significant incentives to cooperate. Sometimes, validators are required to validate multiple chains simultaneously. On top of that, PoS demands validators to lock a substantial amount of their crypto funds, which could result in centralization and might limit participation.

The advantages of Staking

Earning potential 

Staking cryptocurrency is becoming an increasingly popular method for long-term holders. It allows them to put their digital assets to work and generate recurring earnings instead of letting them gather dust in their crypto wallets.  

Security and support 

The best staking crypto protocols allow you to contribute to the security and efficiency of the blockchain projects you support. Opting for the best staking crypto platform can help make the blockchain protocol more resilient against potential attacks and enhance its transaction processing capabilities. 

Get more tokens 

There are crypto projects that award “governance tokens” to staking participants. Governance token provides participants with voting rights on issues related to the further development and operations of the blockchain project. This offers an additional opportunity for participants to have a say in the direction and management of the projects they support. 

The risks of staking 

Lock in period 

Staking frequently entails a lockup or “vesting” period during which your crypto cannot be transferred or liquidated for a specified time frame. This is among the downsides of stacking since staked tokens cannot be traded during this time, even if market prices change. Investigating the varying staking requirements and rules for each project you are interested in before staking is essential. 

Volatility 

The cryptocurrency markets are highly volatile. The markets take deep dives, sometimes double-digit price swings during crashes. Even though the best staking crypto platform you’ve opted for provides lucrative annual returns, you’re likely to incur a significant loss if the market drops and the cryptocurrency price falls.

Why are institutions opting to stake in the current macro environment?   

In 2023, most investment strategists at big institutions factor in the growth potential of crypto-tokens and digital assets. Staking is among the well-known crypto-investment strategies. The recurring passive income on funds is one of the biggest reasons institutions consider staking the best crypto-investment strategy. Additionally, the rewards earned by staking function like compound interest in traditional markets when returns are reinvested in the market. The rewards are offered in the native token enabling institutions to invest back in the crypto-protocol. Investing back in the same protocol allows institutions to claim a higher payout in the future. Such investment strategies help reduce the fees usually incurred while swapping cryptocurrencies for a stablecoin or a fiat currency. There are other reasons why institutions should opt for crypto-staking over other forms of crypto-investment. Unlike other crypto-investments, staking doesn’t require institutions to lend their funds to other parties. When staking your funds, you must store a specific amount of crypto-tokens in a crypto wallet. Before withdrawing staked funds, institutions are required to know the un-bonding period specifics of that crypto-protocol.   

According to several crypto-experts, staking is a viable option for institutional investors who are more interested in generating a yield on their long-term investments and are unconcerned about short-term market fluctuations. But institutions that need access to their funds in the short term before the crypto staking period ends shouldn’t be staking their funds.     

It is advisable to understand the staking period’s terms clearly. Additionally, institutions should work exclusively with reputable companies that uphold high-security standards. Other than that, if the returns, rewards, and interest rates offered by the crypto-staking platform appear too good to be true, institutions should approach them cautiously. Like any other investment, staking crypto comes with its own set of risks. It always carries a high risk of loss. 

Conclusion

As the web 3.0 industry continues to evolve, we will likely see more PoS-based mechanisms being adopted by blockchain protocols because it is energy-efficient, faster, and more scalable than the previous mechanisms.

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More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture