Quick reads

What is crypto staking?

by Blocks99

2 months ago

Cryptocurrency mining requires powerful computers and high energy consumption. A less costly alternative, crypto staking enables users to earn by simply depositing assets.

In essence, crypto staking is simply holding a token in a wallet for a fixed period and earning interest on it. This is quite similar to how someone can earn interest by depositing money in a bank account or a term-deposit savings account. The difference is that by holding cryptocurrency funds in a wallet, the user supports the operations of a blockchain network and earns rewards for participation. This mechanism, termed “proof of stake” (PoS), gives currency holders some decision power regarding the network.

Unlike proof of work (PoW), which relies on mining to verify and generate new blocks, PoS produces new blocks through staking without relying on mining hardware. There is no competition to add the new block, as the validator is selected based on the number of coins users have deposited in their wallets. The more coins a user deposits as stake, higher the chances of being chosen as a validator and the higher the resulting income. In the case of delegated proof of stake (DPoS), users delegate the tokens to others. These do all the upkeep work and get a share of the reward in return.

Staking offers an array of benefits:

  1. No need for users to buy expensive powerful computers to validate and start earning rewards.
  2. All users who hold tokens above a certain minimum value get a fair chance and guaranteed returns when they validate and generate new blocks.
  3. The value of tokens staked in wallets does not depreciate with time, unlike mining hardware. The value is dependent only on the market price of the tokens.
  4. PoS is faster, more energy-efficient and environmentally friendly than proof of work protocol.
  5. PoS is lesser prone to 51% attack.

Popular cryptocurrencies that allow staking using PoS include:

Tezos

The first proof of stake cryptocurrency that is supported by all major exchanges for staking. It provides annual returns of approximately 6.8%.

Dash

It allows its investors to stake coins through a master node. The minimum requirement to run a master node is 1000 Dash units.

Neo

Participants on the platform can stake their coins by binding coins in a NEON wallet. Stakeholders can expect to earn new coins at 5.5% annually for all the coins that they stake.

OkCash

It is designed to be suitable for micro-transactions. The coins can earn an annual return of 10% of the value of the stake.

(Source: stakingrewards.com/assets)

What is a staking pool?

Staking pools are formed with similar intentions to those behind mining pools. When several coin-holders pool their resources to increase their chances of validating blocks and receiving rewards, the merged portfolio is called a staking pool. They combine their staking power and share the block rewards proportionally to their individual contributions. Pool providers charge a fee as a percentage of the staking rewards distributed to participants.

Staking strongly reduces the entry barriers to blockchain governance. However, pools always carry an inherent risk that users might get cheated or receive smaller rewards. For this reason, it is advisable to do thorough research and ensure full transparency before sending funds to a wallet.

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