Beginners Guide

What is Cryptocurrency Staking? Explained in Layman’s Terms

Staking means holding cryptocurrency or tokens to support a network operation and getting a reward for it. Naturally, this process is typical for blockchains using the PoS protocol or any of its versions.

Staking brings in the concepts of familiarity, engagement, and reward into the ecosystem.

In this article, we will provide you with the complete guide on Staking and glance at its working, benefits, and much more. Let us look into this review in detail now.

What is Staking?

Staking generally refers to the holding of your cryptocurrency funds in a wallet and hence supporting the functionality of a blockchain system. The cryptos are being locked in their wallets by the stakeholders. They are then rewarded by the network in return. Staking provides a way of making an income.

Staking is a process similar to having a savings account with your bank and earning interest on the deposits. Staking is a great addition to the cryptocurrency space which offers notable applications. Staking also brings the aspects of familiarity, engagement, and reward into the ecosystem. This makes the investment all the more worthwhile.

What is Proof of Stake (PoS)?

Proof of stake is a protocol that allows the participants to stake the coins. It then randomly grants one of them the right to validate the next block at unique intervals. The chances of getting chosen are dependent on the number of coins. There are higher chances if you have a higher amount of the coins locked up.

Sunny King and Scott Nadal initially implemented proof of stake in their Peercoin 2012 paper. They were the first to describe and implement this idea for the crypto project Peercoin (PPC). Originally, its blockchain was using a hybrid of PoW and PoS. 

The development of the blocks is dependent on the ability of the Proof of Work protocol to solve the hash challenges. However, In the case of Proof of Stake, it is determined by the amount of the staking coins held by the users.

What is the Delegated Proof of Stake (DPoS)?

An updated and modified version of PoS was then introduced by a crypto entrepreneur Daniel Larimer. This has been called Delegated Stake Proof (DPoS). Bitshares was the first network to adopt this protocol. In DPoS, The crypto holdings of all the users of the network are converted into votes. These votes are further used to elect trusted delegates.

The delegates validate and check the overall transactions and the normal functionality of the network. The bigger is your stake, the more powerful your vote. As a stakeholder, you get a regular reward for keeping your crypto in the network.

DPoS improves network capacity by increasing the speed of transaction processing. It is achieved as the DPoS model allows reaching consensus much faster, since it needs fewer nodes to validate a transaction. However, Delegate Proof of Stake usage promotes centralization.

How does Staking work?

Unlike PoW, this protocol does not rely on miners who validate blocks by doing the work. This work consists of solving math puzzles using increasingly powerful mining hardware. Instead, the mining power of any network participant depends on how many coins they commit to stake. It allows a PoS-based blockchain to avoid usage of ASICs and other equipment that consumes a great amount of electricity.

New blocks are produced and validated. The coins are locked up by the validators and are randomly selected by the protocol to create a block at the specific intervals. Typically, participants with greater stakes are more likely to be selected as the next block validator.

Advantages of Staking 

It increases your chances of becoming the validator for the next block with the increase in the amount of stake. Thus there are increased chances of grabbing the reward. The Proof of stake model also helps in saving a lot of money. It eliminates the need for investing money in expensive mining hardware and cooling equipment.

Further, there is also no need to pay for the huge electricity bills every month. The money you spend is accounted for as direct cryptocurrency investment. Every Proof of stake network features its own staking currency. Staking also ensures increased scalability.

The decision making is delegated to the trusted nodes. These delegates deal with the issues of much importance and are responsible for the blockchain handling. They play a key role in consensus achievement and make management decisions.

Staking Pool

A Staking pool is formed with the combination of many network stakeholders together. It further increases their chances of validating a new block and also getting rewarded for it. The rewards are proportionately distributed within all the participants similar to the Proof of work mining pool. You earn a bigger share with the more amount of money you invest in it.

If your network has a high entry barrier, then Pooling might be the best staking solution. But you need to invest a large amount of money to enter the pool. In addition, the maintenance and development costs to be considered as running a pool is not free. There is usually the membership fee that has to be provided to the pool providers. It is usually taken as a fixed percentage from the share rewarded.

Besides, pools may offer some of the additional benefits related to withdrawal time, minimum balance, etc. It further attracts new participants, resulting in a greater degree of decentralization of the network.

Cold Staking

The process of staking the cryptos using a cold or hardware wallet is known as Cold staking. There is no connection to the internet in a cold wallet. The funds are allowed to stake in the cold storage by most of the networks. It can also be done with the help of the air-gapped software wallet. One of the major advantages of cold staking is that the funds are completely safe and secure.

It is generally one of the main priorities for large stakeholders. It is particularly used by them who want to ensure the maximum protection and safety of their funds along with supporting the network. They are being devoid of the rewards  if the stakeholder takes the crypto out of the cold wallet

Future of Staking   

As staking is becoming increasingly popular, there is an increase in the number of users involved in the staking process. They are seeking to invest their assets to participate in blockchain management. 

Further, the entry process is tending to be much more user-friendly to cope up with the demands of the users. This would result in more people, taking an active part in the development of their blockchain ecosystems.

Conclusion

In conclusion, staking is a creative and innovative investment tool. It can compete with traditional ones in terms of stability. In terms of the growth potential of the assets, it is superior to them.

Proof of Stake and staking creates more opportunities for anyone likely to participate in the consensus and governance of blockchains. In addition, it is regarded as an easy way to earn passive income by simply holding coins.

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Qadir AK

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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