More and more public chains have opted for the proof-of-stake (PoS) consensus mechanism since 2018, allowing users to make lucrative returns by staking their tokens. Staking has become more diversified recently as the PoS mechanism is evolving. Today’s TRON 101 will share with you the concept of staking.
What Is Staking?
Staking, in other words, is the pledging of rights or interests. It allows users to utilize the PoS system (i.e. the staked tokens) to reach a consensus on the blockchain.
Users need to lock up, or stake, their tokens for a chance to be selected randomly by the DeFi protocol to validate blocks. However, not all who have staked their tokens are eligible to become validators: restrictions vary with DeFi protocols.
For instance, validators in the TRON network, also called Super Representatives (SRs), are elected by votes. Any TRON account can apply to become an SR candidate for the election by paying 9,999 TRX.
Any TRX holder can vote for SR candidates. The 27 candidates with the highest votes from the community will be elected SRs, while the 28th-127th will become SR partners. SRs are obligated to create blocks and package transactions, and they will receive vote rewards and block rewards in return. SR partners are not responsible for these tasks and will receive vote rewards only.
Moreover, all SRs, SR candidates, and SR partners have the right to initiate proposals to change the parameters of the TRON network.
While new modes have emerged including yield farming, swap farming, and gas fee mining, staking remains the most popular choice to increase liquidity and value for PoS and DPoS public chains and has become the mainstream product for exchanges and developers.
Staking Metrics: APR and APY
Staking is now no longer a simple “lock & vote” as many have understood: it has become a form of financial service. Apart from the risk level, the most commonly used gauges for evaluating the various staking products in the market are APR and APY, as well as TVL (total value locked).
APR and APY are usually brought up together. APR (annual percentage rate) in a crypto sense is the same as in traditional banking. The main difference between APY (annual percentage yield) and APR is that APY involves compound interest, but the latter does not.
Deposit 1M for 3 years with an APR of 6%: principal + interest = 1M x (1 + 6% x 3) = 1.18M
Deposit 1M for 3 years with an APY of 6%: principal + interest = 1M x (1 + 6% ) ^3 = 1.191M
Therefore, since APR and APY are calculated differently, users may choose varying ways for staking.
Finally, staking investors should be aware of risks in three respects: a) security: it is advised that users choose reliable and secure platforms. Otherwise, the staked tokens may be lost or stolen; b) exchange rate: users may enjoy a high APR or APY from staking products, but they may still lose their principal when the market moves aggressively; and c) liquidity: better solutions for the liquidity risk will come up as technology advances.
Based on the underlying layer of the public chain ecosystem, staking has marched into its fifth year of development. We are confident that as the industry matures, there will be more staking players, investment opportunities, and ways to generate profits.