Staking is now a popular strategy among cryptocurrency investors who want to earn more crypto without selling their assets. It’s a way to earn more incentive on their crypto, in the absence of the hassle of trading it. Plus, it offers the potential for greater returns than traditional investment methods.
Basically, staking is like depositing cash in your bank account to get interest.
One key difference between staking and the money deposited in your bank is that, the money deposited to your account is used to produce loan for other people, in order to get interest they would share with you. In contrast, when you commit your crypto to a blockchain, you are assisting to guide and validate transactions in that blockchain network and in return, giving you incentive for your contribution. To understand this whole concept of staking, let’s begin with this.
What is Cryptocurrency
Cryptocurrency is a digital medium of exchange that uses cryptography for safeguarding transactions. It operates on a technology known as blockchain, which records and verifies all business transactions. It is designed to work as a medium of exchange, just like traditional money, but it exists entirely in electronic form.
What is Staking
Staking is the method that allows users to earn incentive for committing and joining their cryptocurrency tokens to help safeguard a blockchain network. By connecting their tokens, users contribute to the network’s consensus mechanism, which ensures the integrity of the blockchain and verifies transactions. In return for their contributions, users are rewarded with more cryptocurrency tokens.
What is Blockchain
Blockchain is a public ledger used to keeps record of transactions. Whenever a transaction happens, it gets recorded in this digital file, and everyone who has a copy of this file can see it. Once a transaction is entered into the blockchain, it’s very hard to change or remove and each transaction is connected to the previous one, creating a chain of transactions. If someone tries to alter a past transaction, it would require changing all the subsequent transactions too, which is practically impossible because many people have copies of the file, and they would notice the inconsistency, these enable people to trust and verify data without relying on a central authority.
What is crypto Staking
Cryptocurrency staking is the method of commiting and locking your asset in a digital wallet to help the blockchain network and in return earn incentive for contributing to the blockchain. There are many benefit Crypto staking offers, which include the potential of earning passive income through incentive. Active participation in blockchain network and supporting the security and consensus of the network.
Staking is a tool use in certain blockchain to guide the network, confirm transactions, and engage in the agreement exercise. It includes holding a certain amount of coin in your digital wallet to help the network operations. Cryptocurrencies makes use of blockchain technology for secure and transparent agreement, while staking enables participants to support blockchain networks by verifying businesses and connecting the network. Stakes are rewarded with additional coin for their involvement, incentivizing network stability and security. In essence, blockchain powers cryptocurrencies, and staking allows individuals to contribute to blockchain networks and earn rewards.
Proof of Stake (PoS) are consensus mechanisms used in blockchain networks to achieve consensus and validate transactions. They are alternatives to the more commonly known Proof of Work (PoW) consensus mechanism used by cryptocurrencies like Bitcoin.
Proof of Stake (POS):
In a POS system, authenticators are selected to create a new blocks and attest to a transactions depending on the number of coins they stake in the network. The more coin an authenticator has, the higher the possibilities of being selected to create a new block. This process is known as “minting” new coins. Verifier are expected to commit a certain amount of their coin as collateral, which can be lost if they attempt to attack or manipulate the network.
The selection of verifier in a POS system is typically random but weighted according to their stake. This randomness helps prevent a single entity from gaining complete control over the network. POS systems consume less energy compared to PoW, as they don’t rely on computational power and mining hardware.
Delegated Proof of Stake (DPOS):
DPOS is slightly different from PoS, it introduces a voting and delegation structure. In DPOS, participants vote to choose a number of trusted authenticators called “delegates” who will authenticate blocks and verify transactions on their behalf. These delegates are in control of keeping the blockchain and ensuring its security.
The number of delegates are usually small (e.g., 21) to enhance efficiency and speed. Delegators, who hold the coin, can participate in the network by selecting their preferred delegates and voting for them. Delegates are typically rewarded with transaction fees or newly minted coins for their services. If a delegate behaves maliciously or fails to fulfill their duties, they can be voted out and replaced by other trusted delegates.
DPoS aims to provide fast transaction confirmation times and scalability while maintaining decentralization through the voting process.
DPoS aims to provide fast transaction confirmation times and scalability while maintaining decentralization through the voting process.
Other Blockchain that supports staking include
- Cardano a blockchain platform that supports proof-of-stake (PoS) consensus mechanism. You can stake your ADA tokens in a stake pool to support the network’s operations and earn rewards in return.
- Polkadot a multi-chain platform that allows for interoperability between different blockchains. It employs a PoS mechanism where DOT holders can bond their tokens as collateral to participate in the network’s consensus and governance.
- Tezos (XTZ): Tezos is a blockchain that implements a self-amending governance model and a PoS consensus algorithm called Liquid Proof of Stake (LPoS). XTZ holders can delegate their tokens to bakers (validators) and earn rewards for participating in block creation and validation.
- Cosmos (ATOM): Cosmos is a network of interconnected blockchains that uses a consensus mechanism called Tendermint. ATOM holders can stake their tokens and delegate them to validators to secure the network and earn staking rewards.
- Avalanche (AVAX): Avalanche is a decentralized platform that aims to provide fast and secure transactions. AVAX holders can stake their tokens to help secure the network and earn rewards.
- Solana (SOL): Solana is a high-performance blockchain platform that uses a PoS consensus mechanism. SOL holders can stake their tokens to participate in consensus and earn staking rewards.
How cryptostaking works
- Select a blockchain network that supports staking. Some examples are Ethereum 2.0, Cardano, Polkadot, Tezos etc
- Acquire the specific cryptocurrency or tokens related to the blockchain network you’re staking on. These tokens typically represent your stake in the network’s security and decision-making process.
- Create a wallet, this wallet can be a soft wallet, hardware wallet, or even a staking platform provided by certain exchanges.
- Transfer your tokens to your staking wallet and lock them up for a predetermined period. This process ensures that you cannot spend or transfer the tokens while they are staked.
- Your staked tokens would be used to vote on the validity of transactions and create new blocks in the blockchain. The weight of your vote is proportional to the number of tokens you have staked.
Validators who participate actively in block authentication and network maintenance are rewarded with additional tokens.
In some POS networks, authenticators may also face penalties or slashing if they behave maliciously or fail to fulfill their duties. This can result in a reduction or loss of staked tokens as a form of punishment for misbehavior.
After the staking period is over, you can typically unstake your tokens and withdraw them from the staking contract or platform. There may be a cooldown period or lockup period during which you cannot access your tokens.
How cryptostaking Reward are calculated
Cryptostaking rewards are calculated based on the amount of crypto that you stake and the period of your staking duration. The specific method of calculating rewards may vary depending on the blockchain network and the staking protocol being used. However, this is a general overview of how staking rewards are commonly calculated.
Staking rewards are often expressed as an annual percentage yield (APY). The APY represents the expected annual return on your staked funds.
The staking rate refers to the proportion of the total cryptocurrency supply that is being staked by all participants in the network. A higher staking rate generally results in lower rewards due to increased competition.
Many blockchain networks with staking mechanisms have an inflationary model, where new coins are created and distributed as incentive to stakers. The inflation rate determines the annual increase in the total supply of the cryptocurrency. Stakers receive a portion of the newly minted coins as their rewards.
Some networks use Proof-of-Stake (POS) consensus mechanism that requires a validator to stake a certain amount of cryptocurrency to participate in the network. Validators are responsible for keeping the network and verifying transactions. Their performance in maintaining uptime, following the network rules, and avoiding penalties can affect their rewards.
In POS networks, authenticators may face slashing penalties for misconduct or violating network rules. Slashing can result in a reduction of the staked amount or even complete forfeiture of the stake, leading to a loss of potential rewards.
Risk involve with staking
The price of the cryptocurrency may fluctuate, and if the price decreases, the value of your investment may also decrease. Like all cryptocurrencies, there is a risk associated with price volatility, which can lead to potential losses.
If the network experiences technical issues, security vulnerabilities, or a malicious attack, your staked assets could be at risk. In extreme cases, you may even lose a portion or the entirety of your stake.
Some blockchain networks implement slashing mechanisms to penalize malicious or incorrect behavior by validators. Validators who engage in actions that violate the network’s rules may have a portion of their staked assets slashed or forfeited as a penalty. This risk emphasizes the importance of proper configuration and adherence to network rules.
Many staking networks have an inflationary design, meaning that new tokens are created and distributed to validators as rewards. However, this increased token supply can potentially lead to inflation, which may erode the purchasing power of the tokens you earn through staking.
When you stake your assets, they are committed for a specific period of time, known as the staking period. During this period, you won’t be able to access or sell your staked assets easily. So if you require immediate access to your funds, staking may not be the most suitable option for you.
The regulatory framework for cryptocurrencies and staking is still evolving in many parts of the world. This means that there is a risk that new regulations could be introduced that affect staking activities, such as restrictions, taxation, or even bans on certain types of staking. It’s important to stay up to date with regulatory developments and be aware of the potential risks involved in staking.
Benefit involved in Staking
Staking allows crypto holders to earn rewards for staking their cryptocurrency tokens in a digital wallet. These rewards are paid out in additional tokens by the blockchain network, and the amount of rewards earned can vary depending on factors such ask the network’s staking protocol and the number of tokens being staked. Some networks offer higher rewards than others, so it’s important to research the potential returns before deciding to stake your tokens.
By staking your tokens, you play a direct role in maintaining the health and integrity of the blockchain network. Your tokens are used to verify and validate transactions, ensuring that the network remains secure and decentralized.
staking helps to prevent double-spending and other malicious activities that could compromise the integrity of the network. By participating in staking, you’re making an active contribution to the health and stability of the blockchain.
When viewed from an investment perspective, staking can be seen as a long-term strategy that allows investors to accumulate more crypto assets over time. The rewards earned from staking are added to the investors’ holdings, and if the value of the tokens increases, their total investment could grow as well. In other words, staking can be a way to earn passive income and grow your crypto assets at the same time.
staking provides token holders with the opportunity to participate in the governance of the network. They can vote on key decisions that affect the direction and development of the blockchain, such as proposals for new features or protocol upgrades. Through staking, token holders can directly contribute to the evolution of the network and help shape its future. This can be seen as a way to further increase the value of the staked tokens.
Conclusion
In conclusion, staking is a powerful tool that enables crypto investors or traders to earn incentive for supporting a blockchain networks. There are many benefits to staking, including the opportunity to earn passive income, strengthen network security, and help develop new technology.
