Since Bitcoin was released in 2009, people have been trying to develop new approaches to improving the blockchain infrastructure. One of the alternations has been the implementation of staking practices. Staking offers investors the chance to make their cryptocurrency work for them.
Staking in cryptocurrency
Proof-of-stake crypto coins allow you to participate in staking. However, before you can start all in the process of staking cryptocurrency, you must own a coin that uses a proof-of-stake model. Some of the popular examples include Ethereum, Cardano, Polkadot, and Solana. Each has unique rewards systems and expectations. For instance, Ethereum needs to use staking because, on top of processing transactions, the Ethereum blockchain is also used to create and buy NFTs and write smart contracts. Then, through a cryptocurrency exchange, you must determine how much you intend on staking.
What is proof-of-work?
Not all coins allow staking. Some of the biggest coins, such as Bitcoin, use proof-of-work. Currencies that use this model essentially force computers to ‘hash’ strings of numbers in accordance with the desired block. The constant generation of these numbers is referred to as ‘work’. When the correct sequence is determined, the miner is rewarded with a certain number of crypto coins. This is because they have added a block to the blockchain. If anyone alters the hash or tampers with the sequence, it is identified as a fraud and an attack on the blockchain. It is immediately rejected, and the chain remains complete and untarnished.
Proof-of-work cryptocurrencies are still capable of adding to the blockchain. However, these are less favorable because to assist, they use considerable computing power and have a far larger carbon footprint. To some, the energy expended to find that one specific hash is too high a price for themselves and the planet.
Therefore, many have started adopting proof-of-stake designs because they necessitate far less energy and do not need batches of computers to constantly be generating code.
Volunteering on the protocol
First, those who own eligible cryptocurrencies pledge their money to the crypto protocol. Protocols are the basic sets of rules that share data between computers. The entire internet is based on them and is dependent on their functionality. For example, HTTP, which begins most URLs, stands for ‘hypertext transfer protocol’. Regarding cryptocurrencies, these rules sustain the blockchain and allow for money to be transferred internationally.
The Bitcoin protocol was so revolutionary because it proved that to transfer money peer-to-peer, one did not need the intermediary of a banking institution. These agreements between computers are what allow the blockchain to exist and cryptocurrencies to be exchanged.
After you pledge your cryptocurrency to the protocol, you are chosen as a validator, who is responsible for confirming blocks of transactions and helping to build the blockchain. Every time a transaction is approved, it is one step closer to adding a block. With every block added, new coins are minted and then distributed to those who facilitated the validation.
To increase their chances of successful mining campaigns, many join forces in staking pools. The more coins you dedicate to becoming a validator, the more likely you will be chosen and rewarded with coins. The network also rewards those with coins staked for more extended periods. Therefore, in these pools, crypto traders combine their staked coins and share the profits when they successfully validate a block.
There are pros and cons to joining a stake pool. On the one hand, the more coins that are used together, the more likely you are to be chosen to validate blocks. This means a payout more often. If a pool becomes too large and oversaturated though, while you might be chosen more frequently, the payout will be less as it needs to be shared across more people. In both cases, the hosts of the staking pool also typically take a small percentage of the rewards. If you decide to join a pool, it is imperative that independent research is done, and the pros and cons are weighed to determine the better option for yourself.
The perks of crypto staking
There are some key benefits of cryptocurrency staking. Unlike crypto mining, there are no elaborate computing setups required. You also retain the rights to all coins staked. Your coins can be always retracted from the staked position, though this reversal is not immediately guaranteed, and investors must note that it can take time to retrieve their coins. Finally, it is a form of passive income because you collect coins as a reward for donating your assets to build the blockchain’s infrastructure. It is a way to make your crypto investments work for you rather than remaining stagnant in a wallet.
The risks of crypto staking
While there are many benefits to staking crypto, there are a few things to note about the endeavor. First, most of the time, the currency that a validator will be awarded will be the same as the currency staked. However, this is not always the case, especially when it’s a currency that shares the blockchain with another coin. Second, when staking some crypto coins, there is a minimum time that you need to dedicate your coins to the protocol on the exchange. If you decide to sell your coins, you will be unable to extract them until that time period is up. Finally, when you choose to unstake the coins, it might take multiple days before they reappear in a digital wallet.
If you decide that the risks are worthwhile and are willing to dedicate your supply to the protocol, you will see that staking in cryptocurrency is a valid approach to making the most of crypto investment.