EARN PASSIVE INCOME BY STAKING

CRYPTOCURRENCY

BY

MUSA JUDITH OSHIORENOYA

MATRIC NO: ICT/2252060502

A SEMINAR SUBMITTED TO THE DEPARTMENT OF

COMPUTER SCIENCE, SCHOOL OF INFORMATION
AND COMMUNICATION TECHNOLOGY, AUCHI
POLYTECHNIC, AUCHI, EDO STATE.

IN PARTIAL FUFILLMENT OF THE REQUIREMENTS

FOR THE AWARD OF HIGHER NATIONAL DIPLOMA
(HND) IN COMPUTER SCIENCE.

SUPERVISED BY
UDUIGUOMEN, U.C.
JUNE, 2022.
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ABSTRACT
In this review, we evaluate how users could earn form generating passive income
through crypto staking. Currently, some savings interest rates can be as high as
10% annually, payable in traditional currency values such as US dollars.
Therefore, one can benefit from the growth of the cryptocurrency markets, with
minimal exposure to their volatility risks. We aim to explain the rationale behind
these savings products in simple terms. The key here is that asset deposits in
cryptocurrency ecosystems are of intrinsic economic value, as they facilitate
network consensus mechanisms and automated marketplaces. Therefore, savings
in cryptocurrency are associated with some unique advantages unavailable in
traditional financial systems. We will go through the implementations of how
savings can be channeled into the staking deposits in Proof-of-Stake (PoS)
protocols, Types, Roles, and Rewards In Stacking Crypto, benefits and risk
involved.

Keywords: Proof-of-Stake (PoS), fixed-rate lending, staking derivative tokens.

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INTRODUCTION
As of year 2021, the interest rates for savings in traditional ‘fiat’ currencies
such as the US dollar and the Japanese yen are at historic lows, at around 0.07%
and 0.01% respectively. Gordon (2019). Low interest rates are not a short-term
aberration, but part of a long-term trend. Ben (2015).
As investors lose confidence in the future value of savings in fiat currencies,
they look for options that would give higher expected returns. Accordingly, the
cryptocurrency market has also flourished during this time. Jabotinsky (2021). But
what if one can benefit from the staggering growth of the cryptocurrency market
without ever ‘investing’ into it? That is, what if one can sidestep the financial risks
directly associated with the acknowledged volatility of the market, and yet
generate passive income via interest rates on the order of several hundred times
higher (i.e. 10% annual rate) than what the current traditional financial market can
offer?
Fortunately, certain existing cryptocurrency protocols may be able to help us
bridge this gap. To anticipate, the general rationale behind is simple: in many
modern blockchain systems the integrity of the ledger is supported by the Proof-of-
Stake (PoS) consensus mechanism.

PROOF OF STAKE CONSENSUS

Proof of stake in crypto is a consensus mechanism -- a way for a blockchain
to validate transactions. The nodes in a blockchain must be in agreement on the
present state of the blockchain and which transactions are valid.
There are different consensus mechanisms that cryptocurrencies use. Proof
of stake is one of the most popular for its efficiency and because participants can
earn rewards on the crypto they stake. Staking rewards are an incentive that
blockchains provide to participants. Each blockchain has a set amount of crypto
rewards for validating a block of transactions. When you stake crypto and you're
chosen to validate transactions, you receive those crypto rewards.

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WHAT IS STAKING IN CRYPTO?
Your crypto-assets earn while you sleep!

Simplified Staking

Source: https://medium.com/chorus-one/introduction-to-crypto-staking-ced72bc1756b Fig 1.1

According to Rishi (2021), Staking is an umbrella term used to denote the

act of pledging your crypto-assets to a cryptocurrency protocol to earn rewards in
exchange. Staking allows users to participate in securing the network by locking up
tokens. Consequently, users are rewarded for securing the network in the form of
native tokens.
Your coins are still in your possession when you stake them. You're
essentially putting those staked coins to work, and you're free to unstake them later
if you want to trade them. The unstaking process may not be immediate; with some
cryptocurrencies, you're required to stake coins for a minimum amount of time.
Staking isn't an option with all types of cryptocurrency. It's only available with
cryptocurrencies that use the proof-of-stake model.
If you want to stake crypto, you need to own a cryptocurrency that uses the
proof-of-stake model. Then you can choose the amount you want to stake. You can
do this through many popular cryptocurrency exchanges. The higher the amount of
crypto-assets you pledge, the higher the rewards you receive. The rewards are
distributed on-chain, which means the process of earning these rewards is
completely automatic. All you have to do is to stake them.

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HOW TO STAKE CRYPTO?
Staking cryptocurrency may seem a little confusing the first time around, but it's a
simple process once you get the hang of it. Here's how to stake crypto step by step:

1. Buy a cryptocurrency that uses proof of stake.

You can purchase cryptocurrency from any of this platform such as Binance,
Coinbase, eToro, Kraken. As previously noted, not all cryptocurrencies offer
staking. You need a cryptocurrency that validates transactions with proof of stake.
Here are a few of the major cryptocurrencies you can stake and a little bit about
each one:
 Ethereum (CRYPTO:ETH) was the first cryptocurrency with a
programmable blockchain that developers can use to create
apps. Ethereum started out using proof of work, but it's transitioning to a
proof-of-stake model.
 Cardano (CRYPTO:ADA) is an eco-friendly cryptocurrency. It was founded
on peer-reviewed research and developed through evidence-based methods.
 Polkadot (CRYPTO:DOT) is a protocol that allows different blockchains to
connect and work with one another.
 Solana (CRYPTO:SOL) is a blockchain designed for scalability since it
offers fast transactions with low fees.
Start by learning more about any proof-of-stake cryptos that catch your eye,
including how they work, their staking rewards, and the staking process with each
one. Next, you can look for the crypto you want and buy it on cryptocurrency apps
and exchanges.
2. Transfer your crypto to a blockchain wallet.
After you buy your crypto, it will be available in the exchange where you
purchased it. Some exchanges have their own staking programs with select
cryptocurrencies. If that's the case, you can just stake crypto directly on the
exchange.

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Otherwise, you'll need to move your funds to a blockchain wallet, also known as a
crypto wallet. Wallets are considered the best way to safely store cryptocurrency.
The fastest option here is to download a free software wallet, but there are also
hardware wallets available for purchase.
When you have your wallet, choose the option to deposit crypto and then
select the type of cryptocurrency you're depositing. This will generate a wallet
address. Go to your exchange account and choose the option to withdraw your
crypto. Copy and paste that wallet address to transfer your crypto from your
exchange account to your wallet.
3. Join a staking pool.
While staking can work differently depending on the cryptocurrency, most
use staking pools. Crypto traders combine their funds in these staking pools to
have a better chance of earning staking rewards.
Research the staking pools available for the cryptocurrency you have. There are a
few things to look for here:
Reliability: You don't earn rewards while your staking pool's servers are down.
Pick one that has an uptime as close to 100% as possible.
Reasonable fees: Most staking pools take a small cut of the staking rewards as a
fee. Reasonable amounts depend on the cryptocurrency, but 2% to 5% is common.
Size: Smaller pools are less likely to be chosen to validate blocks but offer larger
rewards when they are chosen since they don't need to divide rewards as much.
You don't want a pool that's too small and could potentially fail. On the other hand,
some cryptos limit the amount of rewards a pool can earn, so the largest pools can
become oversaturated. For most investors, mid-size pools are best.
Once you've found a pool, stake your crypto to it through your wallet. That's all
you need to do, and you'll start earning rewards.

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 TYPES OF REWARDS DISTRIBUTED
1. Staking rewards/inflationary rewards
2. Transaction fees
Staking Rewards — You stake your crypto-assets with a PoS node (a server
running the protocol stack) to validate a block of transactions. If the node you have
delegated to successfully signs or attests to blocks, you receive staking rewards —
thereby increasing your net crypto-assets.
The staking rewards are, thus, an incentive for these nodes to perform the process
of ordering the transactions, verifying them, collecting them in a block, and
subsequently validating the block. When these rewards are freshly minted they get
the name inflationary rewards. Every time a block is validated new tokens of that
currency are minted and distributed as staking rewards!
Transaction Fee — In addition to the staking rewards, each transaction carries
with itself a small fee making it easier for the node to prioritize the selection of
transactions to be entered into the block. The accumulated fees from the underlying
transactions also go to the node.
Transactions are what make up a cryptocurrency. For different protocols, these
transactions could mean different things. They vary from token transfers to smart
contract executions. Despite the dissimilarity in transaction types, the common
thread is that these transactions always get ordered and clubbed into a new block
so that all nodes in a network can agree on the state of the network.
Transactions →Block

Source: https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/what-
is-staking
ROLES IN STACKING CRYPTO
Staking does seem like a fairly useful investment instrument for anyone whose
assets are lying idle in a digital wallet or a ledger. One can perform two roles when
participating in staking.

1. Validation — Appropriate for companies or technical enthusiasts

2. Delegation — Appropriate for most individual crypto-asset holders

Validators are selected randomly to create the block. The probability of a

validator’s selection is directly proportional to the volume of crypto-assets staked.

Delegating your assets means letting them count towards the stake of a validator in
return for a share of the reward received. In practice, a delegator deposits tokens in
a smart contract specifying the validator whose influence in the network she wants
to increase. As a result, the rewards earned in the validation process increase, but
instead of only the validator receiving compensation, the rewards are automatically
split between the validator and the delegator, usually by applying a simple
commission rate as pictured below.

BENEFITS OF STAKING CRYPTO

Here are the benefits of cryptocurrency staking:
 It's an easy way to earn interest on your cryptocurrency holdings.
 You don't need any equipment for crypto staking like you would for crypto
mining.
 You're helping to maintain the security and efficiency of the blockchain.
 It's more environmentally friendly than crypto mining.

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 Retrieved From: https://www.researchgate.net/figure/Comparision-of-proof-of-stake_tbl4_330585021

RISKS OF STAKING CRYPTO

There are a few risks of staking crypto to understand:
8  Crypto prices are volatile and can drop quickly. If your staked assets suffer a
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large price drop, that could outweigh any interest you earn on them.
 Staking can require that you lock up your coins for a minimum amount of time.
During that period, you're unable to do anything with your staked assets such as
selling them.
 When you want to unstake your crypto, there may be an unstaking period of
seven days or longer.
The biggest risk you face with crypto staking is that the price goes down. Keep this
in mind if you find cryptocurrencies offering extremely high staking reward rates.

CONCLUSION
We have reviewed the logic of how the generation of a stable savings interest rate
at as high as 10% annual rate is possible. The key innovation here is to capitalize
on the unique features of decentralized networks and lending marketplaces. In
particular, ordinary savers can participate in multiple network staking. Users can
gain the privilege of becoming validators in the consensus process and the
motivation of such participation can be either rewards, or achieving high security
through collaborative provenance.

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 According to Miller (2021), through staking, one contributes to a process
that allows highly efficient and robust financial services and products to be
delivered, along with other applications of the blockchain system. Outside of the
context of network staking, the same concept applies for liquidity pools, which
allow automated decentralized markets to take place. To capture the growth of the
cryptocurrency market, one can also turn these into passive incomes.

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RECOMMENDATIONS
The staking procedure entails passive earning as the user does not need to
work actively on the network. Ensure Two Factor Authentication for Identity
Verification on staking apps to give safe and dependable investment policy.

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REFERENCES
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rates-so-low/ on July 04, 2022.

Daniela, M. (2018). Analysis of the possibilities for improvement of BlockChain

technology. Retrieved from:
https://www.researchgate.net/publication/330585021 on June 2, 2022.

Gordon, M. (2019). What is the average interest rate for savings accounts?.
Retrieved from: https://www.bankrate.com/banking/savings/average-savings
-interest-rates/ on July 03, 2022.

Jabotinsky, R. (2021). How the pandemic drove massive stock market gains, and
what happens next. Retrieved from:
https://clsbluesky.law.columbia.edu/2021/03/26/how-the-covid-19-
pandemic-affected-the-cryptocurrency-market/ on June 24, 2022.

Lyle, D. (2022). What Is Staking in Crypto?. Retrieved from:

https://www.fool.com/investing/stockmarket/marketsectors/financials/
cryptocurrency-stocks/what-is-staking/. on June 28, 2022.

Miller, N. (2021). How non-fungible tokens will be present at events and how to
start applying them now. Retrieved from:
https://www.specialevents.com/event-tools/how-non-fungible-tokens-will-
be-present-events-and-how-start-applying-them-now/ on July 26, 2022.

Rishi, S. (2021). Introduction to Crypto Staking. Retrieved from:

https://medium.com/chorus-one/introduction-to-crypto-staking-
ced72bc1756b on June 16, 2022.

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