Staking is one of the most common terms you would have come across if you invest in crypto or if you are keeping abreast with cryptocurrency. Staking is best understood as the way of earning rewards for holding certain cryptocurrencies. But exactly what is staking crypto and how do we go about this?
As a start, users would have to commit their crypto assets to support a blockchain and confirm transactions. The more crypto assets a user locks, the more rewards said user would earn. Some exchanges, like Binance, allow users to receive rewards by simply holding coins on the exchange.
Proof of Stake (PoS)
Before we explore deeper into staking, it is imperative that we understand the concept of Proof of Stake (PoS). In the Bitcoin blockchain, Proof of Work (PoW) is the consensus mechanism that is done to create blocks and verify transactions. It is a competition between miners to solve cryptographic puzzles to validate transactions. Miners who successfully solve puzzles will be compensated with a certain amount of cryptocurrency for their efforts.
Having said this, Proof of Work has seen its fair share of adversaries in recent times. Top miners are constantly getting rewards, so some say that it brings centralization in an otherwise supposedly decentralized economy. Others say that the tremendous amount of energy used to verify transactions may be harmful to the environment.
To combat this, blockchain platforms such as ETHereum have turned to Proof of Stake as its primary consensus mechanism to validate transactions and create new blocks in the blockchain. Some cryptocurrencies such as Cardano and Tron use Proof of Stake as their consensus mechanism. Participants offer their coins as collateral for the opportunity to validate transactions and earn a reward. The way in which participants (or “validators”) are determined to create a block is based on the amount of staking coins they are holding. If they were to improperly invalidate bad or fraudulent data, they will be penalised by losing some or all of their stake. Proof of Stake does not require nearly as much energy as Proof of Work. It is thus a more scalable option that can handle greater numbers of transactions.
Conversely, one may argue that Proof of Stake favours the wealthy because it chooses validators that hold the most staking coins.
An alternative
As a result, a popular evolution of Proof of Stake will be Delegated Proof of Stake (DPoS). In this case, users of the network vote and elect delegates to validate the next block. This is to prevent any form of monopoly or centralization over validating the blockchain.
Typically, users are given voting power directly proportional to the amount of coins staked. These votes can then be used to elect a number of delegates that are responsible for validating transactions. These delegates are frequently referred to as block producers or witnesses. They would subsequently be given the authority to agree upon which transactions should be rejected or approved.
Moreover, the DPoS model is known to bring about many benefits. For instance, it is shown to enhance network performance because it allows for consensus to be achieved with a lower number of validating votes.
What is staking?
What is staking crypto then? As aforementioned, validators lock up their coins in a bid to produce and validate new blocks. The blockchain algorithm will then choose potential validators based on the amount of coins staked.
Basically, staking just means keeping funds in a suitable wallet. This means that anyone is able to perform staking responsibilities to earn some rewards. First-time validators can choose to join a staking pool rather than staking solo, which is a group of coin holders combining their resources for a greater chance of validating blocks and earning rewards. Just like solo staking, the rewards are shared proportionally to the amount of assets contributed in the pool.
It is important to note that you do not lose your coins when you stake them. You can unstake them as and when you like if you want to trade them. For some cryptocurrencies, this process of unstaking is immediate; for others, you are required to stake the coins for a minimum set amount of time.
It is extremely simple to stake crypto. Interested participants must first purchase cryptocurrencies that use Proof of Stake. Some exchanges, like Binance, already provide staking options that any user can participate in. Then, move your crypto into a blockchain wallet and join a staking pool. Your assets are still in your wallet, so you don’t have to worry about losing them at all.
In Conclusion
What is staking crypto? This question has inevitably been on the rise in recent times. To understand the concept of staking, one has to have sufficient knowledge on Proof of Stake. If you are a newcomer in crypto, it is recommended to stake some of your assets because the benefits are large. You can easily earn more crypto simply by staking a portion of your coins. Some interest rates can go up to 20% per year. For example, AQRU is a platform that provides up to 12% interest with no lock-in periods.
Of course, it is vital to ensure that the staking platform you choose is reliable and suits your needs. Beware that some platforms have unstaking periods of seven days or longer. This means that you are not able to trade your coins for seven days!
