Did you know that you can store your existing tokens offline and still use them to earn more tokens? This is thanks to a process called cold staking. It is one of the many benefits that cryptocurrencies and the blockchain ecosystem can offer investors these days. But before we tell you more about this, let us first understand the concept of staking and how it works.
What is staking?
Staking is unique to blockchains that follow the proof-of-stake consensus mechanism, like Ethereum 2.0. It is a process that enables the verification of transactions and the addition of new blocks on a blockchain network.
Let us take an example to explain this better. On Ethereum 2.0, users can pledge (stake) their ETH to the blockchain to qualify as a validator. They validate new transactions by ensuring they are consistent with historical records maintained by computers across the network. They then bundle these verified transactions into a block and add it to the blockchain.
By putting some of their own cryptocurrency on the line (staking), users are incentivized to thoroughly vet transactions before adding them to the blockchain. If a block is accepted, the validator gets rewarded in newly minted cryptocurrency. However, if a block has inaccurate data, users can lose some of their staked cryptocurrency — this is known as slashing.
Do note, to start staking on Ethereum 2.0, users need to pledge a minimum of 32 ETH, which is nearly Rs. 29 lakh, at current prices.
Another consideration you need to make is whether you want to validate transactions using your computer. If that sounds like too much work, you can delegate your holdings to a validator willing to do the legwork on your behalf. In this case, you share the rewards with the validator.
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If you choose to delegate, you have two options: stake through an exchange or join a staking pool. These options also remove the high threshold requirement, allowing you to start staking with much smaller amounts. However, no matter which method you choose to stake, they will all require you to hold your tokens in a hot wallet.
A hot wallet is always connected to the internet and is easy to use. But these kinds of wallets are also vulnerable to thefts and hacks. To safeguard your tokens from these cyber threats, you can choose to stake your holdings through a cold wallet or a hardware wallet. This process is known as cold staking.
Let's look at how it works and the benefits it can provide you.
What is cold staking?
Cold staking works like normal staking; only your holdings are stored offline in a hardware wallet. When you start staking offline, you will receive rewards for every block you help add to the blockchain.
Once you remove your tokens from the hardware wallet, you will automatically stop receiving rewards. This method is preferred by large investors who wish to protect their assets during the staking process.
One more unique feature of cold staking is the super staker. These individuals can accept delegated stakes from friends, family and other token holders.
They can begin staking on their behalf without ever touching the delegator's tokens, which are safely stored in hardware wallets. Besides the staking reward, these super stakers can also charge a fee from the delegators.
Currently, offline staking is not as common as online staking; not many blockchains offer this feature yet. Tezos blockchain offers a model similar to offline staking. It allows you to keep your coins liquid, but you must own at least 10,000 XTZ to get started.
One blockchain that does provide offline staking is the QTUM project. Users can delegate their tokens safely without giving up custody or run a Super Staker node by collecting fees from delegators. Some crypto exchanges like Binance, Coinomi and Callisto also offer a cold staking feature.
Benefits of offline or cold staking
As mentioned earlier, offline staking is less susceptible to hacks and attacks as your crypto sits safely in a hardware wallet that is not connected to the internet. The only requirement is that your cold wallet should allow staking.
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They also bring newer audiences into the picture. Users who store crypto in cold wallets and do not trust exchanges or staking pools can now delegate tokens to a friend who can act as a super staker and validate transactions on their behalf. Cold staking, therefore, aids greater decentralization of the crypto ecosystem.
The only drawback is, if you forgot/misplace the login credentials to your hardware wallet, you might lose access to your tokens forever. With hot wallets, the issuing company may be able to recover the wallet, even if you forget the private keys.
