How Does Cryptocurrency Staking Work?

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Cryptocurrency staking is growing popular by the day. It has turned into a decent alternative to traditional bitcoin trading. With enough knowledge, skills, and the right volumes, cryptocurrency stakers can earn a good amount of interest.

In this post, we will take an in-depth look at what cryptocurrency staking is, how it works and how you can maximize your earnings from staking. So, what is cryptocurrency staking?

What is Cryptocurrency Staking?

Cryptocurrency staking is the process of retaining crypto tokens in your digital wallet for a certain period of time and earning an interest in the process. Staking is only applicable to coins the consensus mechanism of which is either Proof of Stake (PoS) or Delegated Proof of Stake (DPoS).

To help you understand staking comprehensively, here is a brief explanation of what consensus mechanism is and which are the most popular consensus mechanisms.

Consensus mechanism is the unique systematic means of agreeing on the value of data or a single state in a blockchain network. In other words, it is a means of verifying or authenticating a transaction on the network. This helps to differentiate genuine transactions from the fake ones.

The most popular consensus mechanisms in use today are described below.

Proof of Work (PoW)

This is the mechanism used by Bitcoin. It works by pitting thousands of bitcoin miners against each other to solve mathematical and computational quizzes on the network. Once a miner solves and finds a solution to a given block, it is possible to inject the new block into the network.

All the users in the network will be able to authenticate the new block before it is added into the network and made available to all for transactions. The miners who solve the quizzes are rewarded with new blocks. After each bitcoin halving, the reward splits in two.

PoW is extremely competitive because of how lucrative the rewards are. It, however, needs a lot of computing power. It also consumes a lot of power. This makes it very expensive to start and sustain. This is why most modern cryptos are opting for alternative consensus mechanisms.

Coins adopting PoW include BTC, ETH, BCH, LTC, and BSV.

Proof of Stake (PoS)

Unlike PoW where all the users in the network help validate a new block, PoS uses a smaller, selected number of users to validate transactions. The selection of validators is based on the number of coins the users have in their wallets (staking). The higher the number of coins a user has, the higher the chance of getting selected as a validator.

When one is selected as a validator and their coins are used to validate new blocks, they are rewarded handsomely.

Coins using PoS include BNB, XLM, DASH, and NEO.

Delegated Proof of Stake

Delegated Proof of Stake is an improved version of proof of stake which ‘centralizes’ the ability to validate new blocks. Users on the blockchain network vote for a certain number of individuals who will be doing the validation on their behalf.

Each user with coins has a voting power proportional to the number of coins they have. These users vote and choose delegates or witnesses who will be in charge of all the validation and authentication processes of new blocks.

Delegates will then be rewarded upon validating new blocks and the rewards are further distributed down to the individuals who voted for them. This system is very reliable as it only gives the power of authenticating blocks to a few individuals who are reputable and are trusted by the majority of the users.

Back to the Staking Process

Now that we have an idea of what consensus is, it is easier to explain staking in detail. While in PoS and DPoS one needs to have coins in their wallet to be able to validate new blocks, staking is the process of holding as many coins as possible in your wallet to increase your chances of participating in the validation process.

Since in PoS validating coins are chosen randomly, it helps to have as many coins as possible to increase your chances. Therefore, to earn a higher interest from your staking, you will need to financially invest and hold the coins in the wallet for as long as possible.

Advantages of Staking Process

Saves Energy

The staking process helps in the minting of new blocks without necessarily consuming gigawatts of power. Staking makes networks self-sustaining. Existing blocks are used to produce new blocks and keep the blockchain going.

Less Expensive

Staking makes it easier and cheaper for users to earn a living from cryptocurrencies. Users don’t need to invest in expensive mining equipment or pay large electricity bills anymore.

Passive Income At Its Best

With staking, you let your money do the work for you. By just being in your wallet, your coins will be earning you interest.

Improved Security

Using stakes improves the security of networks by more than 50%. Staking mitigates most of the attacks which arise from mining.

Disadvantages of Staking

Dormancy of Coins

During the staking period, you can’t move the coins from your wallet. You can trade or transact them only after the stipulated staking period is over.

How to Make the Most of Staking

Select The Best Coin To Stake In

Invest in a coin that is doing well in the market and uses PoS or DPoS. Unless you are planning to invest for the long term, it is advisable to always start small and scale depending on the performance of your initial staking.

Join A Staking Pool

Several coin holders can decide to come together and pool their resources together and form a single staking unit. This increases the chances of the specific staking unit being selected for the validation of new blocks. Once the pool has been rewarded, the individual contributors to the pool will get a share which is directly proportional to their initial input.

Conclusion

It is cool to let your money work for you. If you have some financial resources to spare, then staking is a worthy consideration when it comes to making income from cryptocurrencies.

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