Cryptocurrency staking is a simple, convenient, and cost-efficient way of verifying transactions on a blockchain. It not only allows users to generate passive income through rewards such as extra tokens but also eliminates the need for expensive equipment and energy consumption.
Essentially, staking is the act of holding or locking cryptocurrencies to support the security and operations of a blockchain network. However, not all cryptocurrencies can be held or supports staking.
Find out all you need to know about cryptocurrency staking below.
Superficially, crypto staking appears to be a very simple process – hold some digital coins and receive a reward. However, it is more technical than this – hence the concept of Proof of Stake.
To verify and add new blocks to a Proof of Work blockchain such as Bitcoin, participants must engage in mining – the process of solving complex mathematical problems using special computers. In contrast, with Proof-of-Stake chains, new blocks are produced and validated through staking. Staking entails validators who lock up their coins so they can be randomly selected by the protocol at specific intervals to create a block. Typically, investors that hold larger amounts are more likely to be chosen as the new blocks validator – the more coins you hold, the higher your chances.
In other words, staking eliminates the need to rely on specialized mining hardware, such as ASICs, to produce blocks. While ASIC mining involves significant investment in hardware, staking requires direct investment in the cryptocurrency itself. That is why PoS validators are not selected based on their computational capabilities but on the number of coins, they are staking. The stake or coin held incentivizes validators to maintain the chain’s security as failure to do so might cost them their entire stake.
As mentioned earlier, staking allows participants to receive rewards. These staking rewards are calculated using different methods depending on the blockchain network involved.
With some networks, the rewards are adjusted on a block-by-block basis, taking into account various factors, including:
Some other blockchains determine staking rewards as a fixed percentage. This method is employed to discourage users from spending their coins instead of holding them, as is often the case during inflation. It also enables validators to calculate exactly what staking reward they can expect.
In recent times, the cryptocurrency industry has witnessed a steady rise in users staking crypto to earn fixed interest or yield farming rewards. Staking is straightforward and cost-effective compared to mining, offers a low barrier to entry as almost anyone can join, and enhances scalability.