Crypto

Staking in Cryptocurrency: How it Works

Staking in Cryptocurrency - How it Works

What is Staking in Cryptocurrency?

In this age, it is neither a myth nor a mystery that the cryptocurrency world is filled with unlimited opportunities and explorable potentials. The truth, however, is that each of these opportunities in cryptocurrency surrounds itself with complex terminologies that make it quite difficult for a layman to understand. One of such terminologies is Staking.

This article will judiciously shed light on what staking is and how the average person can benefit by participating in the process.

The term staking would naturally refer to placing a bet or a wager with the hope of receiving rewards or to back up a project or a person financially with the hope that such backup would bring returns.

In cryptocurrency, it is more of the latter than the former. Staking is the process whereby an investor or a crypto asset owner holds his assets or funds in a particular wallet to support the blockchain network performance usually for a defined period to receive financial rewards. In simpler terms, this is when you lock your crypto asset to get rewards.

How does Staking Work?

Often, this is the part where all the technical terms are being mentioned then people get confused and lost. On the contrary, you’ll get the perfect picture in this article.

The first thing is to understand the following terms.

  • Proof of Work (PoW)

This is the protocol that allows blockchain to be created or formed. The blockchain is created through blocks gathered from transactions carried out.

It is more technical in theory as it involves complex computations but the primary idea is that it allows the formation of blockchain from blocks as a result of transactions carried out.

The sole use of the proof of work as a protocol is that it ensures that the network is efficiently secured.

  • Mining

Mining is the process of using computers to solve mathematical problems or puzzles in exchange for tokens or units of cryptocurrency. When a miner solves a particular mathematical problem or puzzle, a block is created. The fastest miner gets the right to validate the next block.

Now, let’s>Hopefully, that’s clear enough.

Imagine countless supercomputers running every day to continue solving these complex mathematical problems. Imagine the amount of electrical power that will be consumed daily to make sure that these supercomputers are active. The power consumed is excessively overwhelming. There are reports that the consumption of Bitcoin is higher than that of some developed countries in the world.

In a world where we are looking to balance carbon emission and carbon absorption, an alternative should be provided sooner rather than later.

Another issue with the Proof of Work is that miners exchange their rewards to fund the electrical bills and rent of these mining stations. When they do, it affects the market price significantly.

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All these shortcomings being said, then the term Proof of Stake (PoS) comes in.

Proof of Stake

If Proof of Work is when the system creates a block when a particular problem is solved through complex computers. Proof of Stake is when blocks are validated randomly based on an individual’s stake. The higher one’s stake, the higher the chances of having the right to validate the next block.

Simply put, the higher your stake, the higher your chances of being rewarded.

Rewards 

Proof of Stake is a system that subjects the ability one validate a block on the number of tokens or coins that have been staked or held. In exchange, the stakeholder gets rewarded with the native tokens while some other platforms reward in another token.

On some cryptocurrency platforms, rewards are fixed in certain percentages. You’ll be able to see the percentages beneath each staking category.

Some rewards are predictable and can be calculated while some are based on probability.

Another way that crypto holders can maximize their return is by consolidating their crypto assets together as a group to increase their chances of getting the rights to validate blocks and get rewards. This process is called staking pool.

Interestingly, one can stake through crypto wallets that are not connected to the internet. People that have enormous amounts of crypto assets use this medium to participate in staking.

Where can Staking be done?

Staking can be easily done in popular crypto wallets such as Trust wallet. Many crypto exchange platforms such as Hotbit, Binance, Mexc also provide the avenue for their users to stake easily.

Some platforms charge a certain amount of fee while some are completely free. Also, staking rewards are distributed at certain periods. These periods are usually specified by the platform. Some are distributed monthly. Others weekly or half-yearly.

Merits of Staking

  • It is one of the easiest ways of making profits in cryptocurrency
  • It is one of the most secure ways of earning native crypto tokens on exchanges
  • The rate of return is predictable.
  • Earning period is not a mystery
  • Most cryptocurrency exchanges and wallets offer rewards for staking. Thus, it is open to everyone interested in staking.
  • It doesn’t require special technical knowledge.

Conclusion

Over time, cryptocurrency has proven to be a pathway into a financial breakthrough for many. Through staking, you can enjoy your share of the crypto cake. It is pertinent to note that it is important for you to further research any crypto wallets or exchanges that you’ll want to stake to make use of the best strategy. This will help to minimize the risks that are associated with crypto investments.

The Author

Awoyele Olanrewaju

Lanre is a professional writer with over eight (8) years of experience. He has created various content across multiple niches such as business, academic, grant research, and cryptocurrency.

His research and writing skills have helped start-ups and non-profit organizations secure grants. He has also worked with different De-Fi organizations such as Algorand, Bluezelle, and EasyFi, and Status to create amazing cryptocurrency content.