Staking not only protects your Polkadot investment from DOT inflation but also gives you monetary returns.
Polkadot is one of the most promising Blockchain projects. It is drastically different from Bitcoin. Nowadays, Bitcoin is considered digital gold and a store of value. Over the years, it became apparent that it can’t be used as a digital transactional currency. It’s slow and has high transaction fees.
Other cryptocurrencies and blockchains such as Litecoin, Dogecoin, Ethereum also have benefits and drawbacks. However, one coin can’t fit all. Several blockchain projects will always exist simultaneously. Currently, all these cryptos are isolated and have no interconnection. It’s like an island without communication with the outside world. Polkadot’s primary goal is to provide a platform to all these blockchains, a method of intercommunication.
The name of Polkadot’s native token or cryptocurrency is DOT.
We know that Bitcoin is deflationary and has a fixed coin supply. The Bitcoin network will produce a maximum of 21 million Bitcoin. On the other hand, Polkadot is inflationary. So far, 1.1 Billion DOT coin has been produced, and the inflation rate varies between 6% to 10%. Therefore, DOT is not the best crypto for the store of value.
If you buy Polkadot and hold onto it, theoretically, your investment would lose 6% to 10% yearly because of inflation. There are two ways you can stop this from happening.
- Actively trade DOT, buy low sell high.
- Stake your DOT.
Trading could be risky, and in this article, we are not going to explore it.
Compared to trading, staking is easy, and the return is predictable with minimal risk. If you stake your Polkadot, your investment would steadily grow over time without doing anything on your part.
For other cryptocurrencies such as Bitcoin, Litecoin, Dogecoin, only miners earn rewards (money) from the blockchain network. As a holder of those coins, you don’t make anything unless those cryptos’ price goes up.
If you want to become a Bitcoin miner, all you need a powerful computer and internet connection. In Bitcoin, Dogecoin, Litecoin, etc., anyone with a powerful computer can become a miner (Validator). However, if one entity becomes too powerful in the network, it can take over the crypto network with a 51% attack strategy. If they attack, there’s no punishment for them.
But, in the Polkadot, not everyone can become a validator. There is a maximum of 1000 slots for validators. Therefore, there is high competition to become a miner in the Polkadot network. In an auction system, the validators have to compete for those slots. Validators have to put a certain amount of DOTs (money) as collateral while working for the network.
Here’s an example. During the early 2021s, a minimum of 1.6 million DOTs was required to become a validator. At $40/DOT, it was $64 million in collateral. Within a few years, the price of DOT would exceed $100. During that time, a validator needs around $150 to 200 million dollars.
For other crypto networks, if a Miner or Validator maliciously attacks the blockchain network, there’s no consequence for that. However, if a validator behaves maliciously in the Polkadot crypto network, their collateral money would be slashed by the Polkadot network.
As you can see, the amount of collateral money is astounding. Sometimes, a validator doesn’t have that colossal collateral. However, DOT holders can help these validators.
A user creates a Polkadot Stash Account and transfers DOTs into it. During the validator voting period, you ask the network to count your DOT as your validator collateral. After voting ends, validators with the highest collateral amount become active in the network, and your Stash Account is locked up for 28 days. During that time, you can’t withdraw your DOTs from that Stash Account. It’s called staking.
Because you are putting your DOT on the line for 28 days to elect a Validator, you get rewards (from new coins and transaction fees) in DOTs from the Polkadot network through your Validator.
Depending on the number of nominators, validators, inflation, transaction fees, and inflation, your staking reward would vary. However, if you chose to stake through exchanges, the process becomes more manageable. For example, if you stake your Polkadot through Kraken, you can get up to a 12% staking reward.
Therefore, staking not only protects your Polkadot investment from inflation but also gives you monetary returns. It’s like a dividend-paying stock (Walmart, Apple). You earn money not only when the share price goes up but also when they pay a quarterly dividend.
Polkadot is one of the highest inflationary cryptos. Please don’t buy and hold DOT unless you are staking. Otherwise, your investment would get devalued rapidly.
More than 60% of DOTs are currently locked by staking, and only 30% of DOTs are liquid in the Polkadot network. You can check the latest real-time statistics here: https://polkadot.subscan.io/. So, when 60% of people are staking Polkadots, why you wouldn’t.