What is Offline Staking? – Everything You Need to Know

Several blockchains have adopted the Proof-of-Stake (PoS) consensus mechanism to verify transactions. Such chains require validators to create and confirm blocks of transactions. Each validator must stake a specified amount of tokens as collateral to start validating transactions. There are two types of staking: Traditional and offline staking.

In this article, we will discuss offline staking. But first, let’s differentiate the two.

Traditional Staking vs. Offline Staking

When crypto users lock their funds in online wallets linked to PoS networks, they engage in traditional staking and are usually directly involved in the transaction validation process. Offline staking, on the other hand, allows crypto users to commit funds to a particular PoS blockchain without having to connect to the internet.

Anyone who engages in offline staking has the ability to assign their validator role to other validators through staking pools while maintaining their money in a cold wallet. This allows them to shield their tokens against internet threats.

Security Measures Employed in Offline Staking

There are numerous security measures applied in offline staking. For example, the use of cold wallets, which store private keys and data in an offline environment, thus reducing vulnerability to various internet threats. However, it is important to connect your cold wallet to the internet once in a while to check for updates of new security features and monitor the activities of the staking node to identify anything suspicious.

Another security measure is the use of multi-sig wallets, which require numerous private keys for a transaction to be authorized. Furthermore, offline staking adopts secure transaction channels, which ensure tokens are transferred safely to a staking wallet.

The existence of these security protocols allows offline staking participants to minimize the risks associated with this activity and protect their staked tokens from unauthorized access.

How Offline Staking Works

In offline staking, participants use third-party staking nodes operated by staking pools to produce new blocks and confirm transactions. To get started, you need to create a staking wallet along with a staking node. You will be required to set security settings and provide information about the PoS network.

After that, you must move the specified token amount to the staking wallet. For instance, Ethereum users are expected to deposit a minimum of 32 ETH to their staking wallet to become validators.

Once you have deposited the required token amount, your staking node will automatically join the consensus process. You will begin to earn tokens for your participation in offline staking.

By reducing exposure to online threats, offline staking allows crypto users to receive rewards and participate in safeguarding PoS blockchains without compromising the safety of their funds.

How Staking Rewards Are Distributed in Offline Staking

When crypto users delegate their funds to validators, their money becomes part of the validators’ staked amounts. These validators then participate in validation and block generation processes to receive staking rewards, which they later distribute to the delegators based on their fund contributions.

Similarly, staking pools run staking nodes on behalf of offline staking participants. After receiving rewards, these pools distribute them to the node owners based on their staked amounts.

Pros and Cons of Offline Staking

Pros

The major benefit of offline staking is increased security, which, as mentioned earlier, is attained using cold wallets that limit hacking attempts and other online risks. Moreover, offline staking allows users to retain control of their funds while participating in the validation process. Last but not least, this type of staking is energy-efficient. With PoS blockchains, you do not need heavy machines to participate in the transaction confirmation process.

Cons

Since you are assigning a staking pool to run your node, you lose certain benefits that come with being an active validator. For example, you won’t be able to use your staked tokens to participate in the governance process of a particular PoS network.

Further, the complexities involved in setting up and managing a staking wallet can be a massive barrier for inexperienced crypto users.