What is crypto staking?Crypto staking involves locking up one’s cryptocurrency holdings to earn interest or rewards. Technically, “staking” is how cer
What is crypto staking?
Crypto staking involves locking up one’s cryptocurrency holdings to earn interest or rewards. Technically, “staking” is how certain blockchain networks verify transactions.
From an investor’s perspective, staking cryptocurrency is a way of growing one’s crypto holdings without needing to buy more. Staking crypto for maximum passive income is a legitimate way of earning yields through one’s existing crypto holdings. Investors who participate in staking enjoy interest that is greater than what is offered through a regular bank account.
If you’re interested in staking cryptocurrency but are unfamiliar with the term, let us get you up to speed. Before we go there, it’s essential to understand the concept of blockchain technology. Cryptocurrencies are built with blockchain technology. Transactions involving such cryptocurrency need to be validated before the corresponding data can be stored on the blockchain. This validation process is called staking.
Let’s break it down further.
Because blockchain networks are decentralized, there are no middlemen. This is in stark opposition to traditional financial systems that use banks, for example, to serve as a repository of the public’s money.
As such, decentralization calls for a publicly accessible record across the network to ensure there is complete transparency and validity across all transactions. Transactions are collated into “blocks” and are submitted for inclusion into this record, which is immutable.
That’s kind of the greatest security feature of blockchains, by the way. Since everything is accessible and verifiable through a distributed public ledger (the record), it’s very hard to trick or hack.
That being said, once these blocks are accepted, users who own these blocks get a transaction fee as payment in the form of cryptocurrency.
What does staking have to do with all of this? you might ask. Simply put, staking is a safeguard against errors and fraud that may happen during the process.
Every time a user proposes a new block or votes to accept a proposed block, they place some of their cryptocurrency on the line. This process incentivizes adhering to the rules. So, in principle, the more crypto a user puts at stake, the higher the chances of earning transaction fee rewards.
However, if a user’s proposed block is found to have fraudulent or inaccurate data, they can lose what they put up as a stake. This process is called ‘slashing.’
How does crypto staking work?
There are many ways to start staking crypto. For starters, you can choose to validate transactions using your own computer. You can also “assign” your crypto to someone you trust and ask them to validate you.
Note that not all cryptocurrencies can be used to stake. We’ll discuss more of this later, so keep reading.
What is proof-of-stake?
Proof-of-stake is a consensus mechanism that allows blockchains to validate transactions. In proof-of-stake (PoS), the number of coins (or the amount of stake) determines the chances of validating a new block.
PoS was created as an alternative consensus mechanism to the original proof-of-work (PoW). PoS is one of the most common consensus mechanisms and is continually gaining traction for its efficiency and the possibility of earning crypto staking rewards.
Unlike PoW which is very energy-intensive and requires a lot of computing power, PoS does not require as much computational work to verify transactions. Coin owners “stake” their coins as collateral in order to validate blocks.
What are staking rewards?
Staking rewards are incentives provided to blockchain participants. In every blockchain, there is a certain amount of crypto rewards allotted for the validation of transactions. As such, participants who stake crypto receive staking rewards when they are chosen to validate transactions.
Basically, staking allows participants to earn more crypto. Interest rates vary depending on the network, but participants can earn as much as 20% to 30% yearly. Many people stake crypto to earn passive income or invest their money.
Ways to Stake Crypto
To stake crypto, one must select crypto that uses the proof-of-stake model, such as Ethereum. There are various ways to stake cryptocurrency:
Through an exchange
You can choose to use an exchange to stake your tokens on your behalf. An exchange is an online service that specializes in crypto matters. Most exchanges ask for a commission in exchange for staking services. Some popular exchanges that offer staking are Binance.US, Coinbase and eToro.
By joining a staking pool
Some investors don’t use exchanges simply because not all of these platforms support a wide array of tokens. So, another alternative is joining what’s called a “staking pool,” typically operated by another user.
You’ll have to connect your tokens via your crypto wallet with the validator’s pool. To ensure the legitimacy of these validators, ensure you check out the official websites of…
cointelegraph.com