Kristina Huse, working student, Blockchain Solutions Center
Maximilian Beyer, Product Owner

What is Staking?

Blockchain technology and digital currencies (cryptocurrencies) based on it create many new opportunities and new business areas. Staking refers to a concrete way to profit directly from this innovation. 

Staking is the process of storing crypto assets in a Proof of Stake (PoS) blockchain for a specified period of time. Compared to Proof of Work (PoW), where consensus building and validation of the next transaction is done by solving cryptographic puzzles, consensus in PoS is achieved by locking and storing the assets in the blockchain. This also helps secure the network and ensure the validity of each transaction. 

Token owners can either stake their tokens themselves and participate in the network as so-called validators or, in the case of Delegated Proof of Stake (DPoS), they can delegate their tokens to a self-selected validator. The validator has the task of providing infrastructure services and is rewarded for this activity by the network in the form of staking rewards. Those who delegate their tokens do not have to perform this activity themselves, but in return share their staking rewards with the validator they have chosen.

In order to fulfill the tasks of a validator, it requires the corresponding hardware. The hardware requirements vary from network to network. As a delegator in a DPoS network, only a dedicated wallet is required.

The amount of staking rewards can vary from network to network, as can transaction costs.

Chances

Staking rewards provide a regular, passive return to the user. Token rewards are independent of the volatility of token prices on the secondary market. 

In the case of delegated staking, the rewards are shared between the validator and the delegator: the share of the infrastructure provider is currently 5-10% on average. 

In delegated staking, smaller amounts can also be invested; the amount of the minimum stake depends on the network. 

Besides the monetary aspect, a validator always supports the respective protocol in terms of further development towards decentralization and independence. 

Risks

Due to the novelty of the topic, there are mainly regulatory uncertainties – for example regarding the tax treatment of staking rewards. In the current draft of the Federal Ministry of Finance in Germany from spring 2022, the speculation period of 10 years for cryptocurrencies is waived – staking rewards would thus be tax-free after one year.

In addition to this aspect, there are also technical risks. Rewards are only paid out by the network to those validators that function error-free – this means above all that they must be online continuously and must not approve any erroneous transactions. As a delegator, it is therefore important to select a trustworthy validator partner. In the worst case, a validator’s misconduct can lead to „slashing“ – which would mean that a part of the stored token is irrevocably destroyed. 

In this risk context, cooperation with a reliable partner who can absorb these risks and advise on all contingencies and options is crucial. 

„Telekom Staking“

Providing infrastructure and the associated trust of our partners has always been Telekom’s core business. The subsidiary T-Systems MMS acts as an infrastructure provider in various public blockchain networks and thus supports the decentralization, stability and security of these. 

Currently, MMS provides validators for the networks Polkadot, Celo, Flow und Q. Token holders can delegate their digital assets to MMS validators, among others, and thus earn rewards from the respective networks. 

T-Systems MMS stands for years of expertise in the blockchain infrastructure sector as well as strong partnerships.


Learnings:


More information in our latest blog post:

> Blockchain – Consensus Mechanisms in Comparison



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Guest author:
Kristina Huse, Blockchain Solutions Center

Kristina Huse is a working student at the Blockchain Solutions Center of T-Systems MMS and supports the Vaas team (Validation as a Service) with research and preparation of staking topics.  


Contact person:
Maximilian Beyer, Product Owner

Maximilian Beyer is a product owner at the Blockchain Solutions Center of T-Systems MMS, a subsidiary of Deutsche Telekom. There, he and his team are responsible for building staking infrastructure for public blockchain networks. Before this, Maximilian gained many years of consulting experience in strategy and digitization projects, which he also uses today in projects in the area of blockchain and web3.