Staking, like many other aspects of cryptocurrency, can be complicated or simple, depending on how many levels of understanding you want to achieve.
The key takeaway for many traders and investors is this method of earning rewards for holding certain cryptocurrencies.
Even if you’re just looking to earn some staking rewards, it’s beneficial to understand how and why it works the way it does.
How Does Crypto Staking Work?
If you own a cryptocurrency that can be staked (current options include Ethereum, Tezos, Cosmos, Solana, and Cardano), you can “stake” some of your holdings to earn a percentage-rate reward over time.
The blockchain puts your crypto to work, which is why it earns rewards while staked.
Cryptocurrencies that allow staking use a “consensus mechanism” known as Proof of Stake to ensure that all transactions are verified and secure without the involvement of a bank or payment processor.
If you choose to stake your cryptocurrency, it becomes a part of that process.
Why is Staking Present in only Some Cryptocurrencies?
It starts to become more technical at this point. For example, It is prohibited to stake Bitcoin. You need a little bit of background to comprehend why.
- A consensus mechanism known as Proof of Work is used by many cryptocurrencies, including Bitcoin and Ethereum 1.0. The network uses Proof of Work to solve issues like validating transactions between strangers on opposite sides of the world and ensuring that no one is attempting to spend the same amount of money twice. “Miners” from all over the world compete to be the first to solve a cryptographic puzzle as part of the process. The winner receives some cryptocurrency in addition to the right to add the most recent “block” of verified transactions to the blockchain.
- Cryptocurrencies are typically decentralised, which means there is no centralised authority in charge. So, how do all of the computers in a decentralised network arrive at the correct answer without being fed it by a centralised authority such as a bank or a credit card company? They employ what is known as a “consensus mechanism.”
Proof of Work is a scalable solution for a relatively simple blockchain, such as Bitcoin’s (which functions similarly to a bank’s ledger, tracking incoming and outgoing transactions).
However, for something more complex, such as Ethereum, which has a huge variety of applications running on top of the blockchain, including the entire world of DeFi, Proof of Work can cause slowdowns when there is too much activity.
As a result, transaction times may be extended and fees may be increased.
What are the Benefits of Staking?
Many long-term crypto holders see staking as a way to put their assets to work for them by generating rewards, rather than just sitting in their crypto wallets collecting dust.
Staking also contributes to the security and efficiency of the blockchain projects you support. By staking some of your funds, you strengthen the blockchain’s resistance to attacks and its ability to process transactions.
Staking Risks to be Aware of
Staking frequently requires a lockup or “vesting” period during which your cryptocurrency cannot be transferred for a set period of time.
This can be a disadvantage because you won’t be able to trade staked tokens during this time, even if prices change. Before staking, it is critical to research the specific staking requirements and rules for each project you wish to participate in.
Staking is a good way for crypto investors to put their assets to work and earn interest and rewards. Furthermore, it can get you involved in the governance and validation of blockchain networks, which may be of interest to some investors.
Consider staking like owning a stock and earning dividends, or putting money in a bank account and earning interest. It can be a low-effort way to grow your account, but do your research and understand the risks of staking before you begin.
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