What is Offline Staking and How Does It Work?
What is Crypto Staking?
Staking is a process of locking cryptocurrencies which are coins or digitized forms of assets that are issued by a blockchain. Staking is a type of savings account alternative in DeFi. Crypto investors are incentivized to lock a given amount of their cryptocurrencies for a predetermined duration in order to earn yield income.
This yield income is based on the APR or annual percentage yield ratio that a staking pool or protocol is offering. Staking usually takes place with the help of smart contracts that are automation protocols on a blockchain or DeFi application.
By locking the tokens on a blockchain or staking pool, the investors warrant the security and stability of a given cryptocurrency project.
Online and Offline Staking in Crypto
Offline staking is also called cold staking and it takes place using a wallet account that is not actively connected to the internet. Investors can perform offline staking by interacting with a PoS or proof-of-stake network without needing to distribute their private keys. Hardware and air-gapped software wallets are ideal for offline staking.
In contrast, online staking takes place using an online or connected digital wallet that is controlled by a third-party or a randomized services provider. In this manner, the investors are able to stake their tokens on an online or active staking protocol in order to earn yield income in exchange for locking their crypto reserves.
How does Offline Staking Work in Crypto?
There are a lot of ways to participate in offline staking using cryptocurrencies. Most of the time, offline staking services are facilitated by PoS blockchains. The simple and most basic way to stake on an offline scale is to lock your cryptocurrency reserves via a hardware or air-gapped software wallet.
However, it is also possible for cryptocurrency investors to stake their crypto holdings by becoming a Super staker or validator or contributing as a delegate.
Super stakers are the investors who offer delegation addresses and receive a small portion of block rewards in exchange for staking services. Delegators are nodes that do not lock their crypto reserves in order to become a validator but instead offer to add their crypto reserves to a validator in order to increase their chances of verifying transactions.
Advantages of Offline Staking
Here are some of the most important aspects of offline staking that every cryptocurrency investor should know about:
- Offline staking offers various advantages such as high security and convenience.
- Offline staking has a greater security on account of using cold storage and hardware wallets for staking.
- Offline staking does not undergo downtime on account of getting disconnected with the internet.
- Offline staking is less costly and more accessible to a greater number of investors around the globe and requires minimal internet connectivity.
Disadvantages of Offline Staking
- Offline staking posits some risks such as counterparty risk.
- Offline staking depends on third-party service providers that require the investors to have technical knowledge in order to operate and manage their staking rewards.
- Cold storage reserves for offline staking can be permanently lost if the investors lose the private keys or end up compromising them.
- Offline staking can be risky since the investors may have to depend on the third-party services providers and they can be untrustworthy or unreliable in some cases.
Is Offline Staking a Secure Way to Earn Passive Income?
The fact that offline staking usually depends on cold storage wallets for securing the reserves of investors makes it intrinsically secure. However, to make the staked reserves more secure than before the service providers are also utilizing the multi-signature wallets.
In this manner, the custodians of the wallets are dependent on multiple warrantors who have to input more than one private key in order to access the staked funds.
Conclusion
Offline staking is a relatively new concept in DeFi that is gaining more traction among investors. High-level security and accessibility are two major benefits of this type of staking option that make it so popular among investors. At the same time, investors should be beware of the associated risks mentioned before and take preventive measures to avoid them altogether.
