Staking

What is staking?

Staking, like many things in crypto can be complex or simple depending on the level of understanding that you wish to gain. Many traders and investors know that staking can be used to earn rewards for holding certain cryptos. This is an important lesson. Even if you aren’t looking to make some staking money, it is helpful to learn a little about the process and how it works.

What Is Staking

If your cryptocurrency allows you to stake — currently available options are Tezos and Cosmos — You can “stake” some holdings and receive a percentage-rate return over time. You can think of a “staking pool” as a savings account that earns interest.

Your crypto will earn rewards when it is staked because the blockchain does its job. The consensus mechanism for cryptocurrencies that allow stakes is called Proof of Stake. This ensures that transactions are validated and secured without the involvement of a bank or any payment processor. If you stake your crypto, it becomes part of this process.

Why Is It Only Certain Cryptocurrencies Allow Staking?

Here it gets more technical. Bitcoin, for example, does not allow staking. You need to know the basics.

  • Cryptocurrencies are often decentralized. This means that there is no central authority overseeing them. How does a network of computers decentralized from a central authority arrive at the right answer? They use a consensus mechanism.
  • Many cryptocurrencies, including Bitcoin, and Ethereum 1.0, use Proof of Work as a consensus mechanism. Proof of Work allows the network to use a large amount of processing power to solve problems such as validating transactions between strangers and making sure that no one is spending the same money twice. The process also involves “miners” from all over the globe competing to solve a cryptographic problem. The winner gets the right to add the most recent “block” of verified transactions to the blockchain and also receives some crypto.

For a simple blockchain such as Bitcoin (which acts a lot like an account’s ledger and tracks outgoing transactions), Proof of Work is a scaleable solution. But for something more complex like Ethereum — which has a huge variety of applications including the whole world of DeFi running on top the blockchain — Proof-of-work can cause bottlenecks if there is too much activity. Transaction times and fees may be longer as a result.

Your crypto will earn rewards when it is staked because the blockchain does its job. The consensus mechanism for cryptocurrencies that allow stakes is called Proof of Stake. This ensures that transactions are validated and secured without the involvement of a bank or any payment processor. If you stake your crypto, it becomes part of this process.

What is Proof of Stake?

Proof of Stake, a new consensus mechanism that aims to increase speed and efficiency while decreasing fees, has been created. Proof of Stake is a cost-saving mechanism that doesn’t require miners to solve complex math problems. This is a time-consuming and energy-intensive method. Instead, transactions can be validated by those who have invested in the blockchain through staking.

  • Staking is similar to mining in that it allows network participants to select the latest transactions and then earn crypto in exchange.
  • Although the exact details of each project’s implementation may vary, the gist is that users place their tokens on the line to get a chance at adding a block to the blockchain and receive a reward. The tokens they stake act as a guarantee that any transaction added to the blockchain is legitimate.
  • Validators, as they are commonly known, are selected by the network based on their stake size and how long they have held it. The most invested participants get rewarded. In what is called a slashing event, transactions in a new block that are found to be invalid can result in users having a portion of their stake burnt by the network.

What Are The Benefits Of Stakestaking?

Staking is a popular way for crypto owners to make their assets work, by earning rewards and not just collecting dust in their crypto wallets.

Staking can also help improve the efficiency and security of the projects you support. Staking funds can make the blockchain more resilient to attacks and improve its ability to process transactions. Some projects give “governance tokens” (which allow holders to have a say in future updates and changes to the protocol) to participants who stake funds.

What Are The Potential Staking Risk?

A lockup period or “vesting” period is often required for stakes. This means that your crypto cannot be transferred for a specific period. This is a disadvantage as staked tokens cannot be traded during the lockup period, even if prices change. It is crucial to understand the staking rules and requirements for each project before you start staking.

How Do I Start Staking?

Anyone can participate in stakes. However, to become a full validator, you will need to invest at least 32 ETH, technical knowledge and a computer capable of performing validations 24 hours a day without any downtime. This level is subject to security concerns and can result in a significant obligation. Downtime could cause validators’ stakes to be slashed.

For the vast majority of participants, there is a simpler way to take part. You can contribute as much as you have to an exchange such Coinbase to a stake pool. This reduces the entry barrier and allows investors to begin earning rewards without needing to own their validator hardware. All Coinbase customers can stake in the U.S., as well as many other countries.

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