If you are into the crypto industry, you probably have heard about cryptocurrency staking. If you are new to this topic, you might think that staking is a less-resource intensive alternative to crypto mining. However, what is staking, and how does it work?
What is Staking?
Staking, also known as cryptocurrency staking, is locking up several personal crypto holdings to earn rewards. By locking up your crypto holdings, you are helping the system to support a blockchain network and confirm transactions.
You can easily stake your crypto holdings directly from your crypto wallet at crypto exchanges that offer staking services such as Binance.
Cryptocurrency Staking works on cryptocurrencies that use the Proof-of-Stake (PoS) model to perform transactions. The Proof-of-Stake (PoS) is an energy-efficient alternative to the Proof-of-Work (PoW) model, which includes mining.
How does Staking Work?
As discussed before, crypto staking works on the mechanism of Proof-of-Stake (PoS). The central concept of proof-of-stake is that it allows user to stake their coins, and after a particular time interval, the system will randomly pick one participant to add or validate the next block in the blockchain.
Usually, choosing the next participant to validate the next block depends on the number of coins at stake. In this method, the decision about who will validate the next block is not based on the ability to solve arithmetic puzzles. Instead, it depends on how many coins a participant is staking.
Delegated Proof-of-Stake (DPoS) is an altered version of the Proof-of-Stake. In this method, staking participants are given votes depending on their coins at stake.
Then participants use their votes to elect several delegates who then manage the blockchain on behalf of voters to ensure security. The rewards are then distributed to elected representatives, who then distribute to voters.
Benefits of Staking
1. Passive Income – Cryptocurrency staking can be used as a source of passive income. You stake your coins and enjoy the rewards on your holdings at the start of every month.
2. Increasing Security – You are improving the security of the blockchain network by staking your crypto holding into the system.
3. Resource-efficient – Staking is a very resource-efficient method of earning rewards as compared to crypto mining. You don’t need expensive equipment and resources like electricity and the internet.
Risks of Staking
1. Cyber Attacks – One of the significant risks of staking is the possibility of a cybersecurity incident such as hacking, which can cause the loss of all the tokens at stake. This risk can be minimized by resorting to cold staking, including storing tokens on a physical hard drive.
2. Price Downturns – Another potential risk is the price downturns during the staking period. Because staking reduces liquidity in the market, which can cause price downturns.
3. Unable to Sell Assets – Staking requires you to lock your coins for a minimum amount of time, which means that you can not do anything with your assets during that period.
Cryptocurrency staking is an environment-friendly alternative to mining to earn money and ensure the security of the blockchain network, making the world a better place.
