If you are a cryptocurrency investor or have even the slightest of interest in the space, cryptocurrency mining is a concept that you might have heard of. Cryptocurrency mining is the go-to method for most crypto investors to facilitate transactions on a particular blockchain network to earn more assets.
However, cryptocurrency mining is not the only way in which you can own more of a particular digital currency. Crypto staking is a method that many cryptocurrencies use to verify the transactions made on their blockchain networks. It allows participants to gain more of the tokens they hold. The question is, “What exactly is it, and how does crypto staking work?”
Crypto staking is essentially a process that involves locking up or “staking” your cryptocurrency assets to support a blockchain network and confirm transactions on it. Cryptocurrency staking effectively involves you using the cryptocurrency units you own to support a blockchain network, and you gain rewards in the form of additional units for facilitating the network.
Today’s post will take a better look at what crypto staking is, how crypto staking works, and other important things that can expand your knowledge. The right knowledge can equip you with information that can help you make more informed decisions on how to earn more cryptocurrency tokens.
What Is Crypto Staking?
You can think of crypto staking as similar to depositing money in a bank. When you deposit your money in an account with your bank, you effectively leave it with them for safekeeping. In exchange for storing your money at the bank, the financial institution will pay you rewards through interest.
Crypto staking is a term that refers to delegating a particular amount of tokens you own to the governance model of a blockchain network. When you stake your cryptocurrency tokens in the governance model, you lock the funds in for a particular amount of time, agreeing not to withdraw them for a predetermined period.
Doing this benefits a network by potentially increasing the value of a coin by limiting its supply. Additionally, the tokens can be used to govern the blockchain network through a proof-of-stake rather than a proof-of-work system, which incorporates mining cryptocurrencies.
PoS systems use staked coins to forge new blocks on the blockchain and reward the “stakers” for participating. PoS has been found to be a more efficient method to verify transactions on blockchains.
How Does Crypto Staking Work?
Cryptocurrencies that use the PoS model rely on crypto staking to forge new coins on the blockchain network. The process of crypto staking involves participants staking their coins to the cryptocurrency protocol. The protocol then chooses participants at random to confirm blocks of transactions. The more coins you stake, the likelier you are to be chosen as a validator by the cryptocurrency protocol.
Each time a new block is added to the blockchain network, new cryptocurrency tokens are minted and distributed to the block’s validator as a reward for staking. Most cryptocurrencies typically reward stakers the same cryptocurrency’s units as rewards for staking, but some blockchain networks may use different cryptocurrencies for distributing the rewards.
If you want to stake crypto, you first need to own a cryptocurrency with a blockchain network that uses the PoS model. Once you purchase the cryptocurrency’s units through an exchange, you can choose the amount you want to stake.
When you stake your coins, you still own them, but you cannot use them. You essentially put your staked coins to work, supporting the blockchain network’s governance. You are free to “unstake” them later for trading, but only after a predetermined amount of time.
Cryptocurrency staking is not available with all types of cryptocurrencies. It is only available with cryptocurrencies that use the PoS model to verify transactions on their blockchain network.
The Proof-of-Stake model has become increasingly popular over the years because the Proof-of-Work model requires significant computational power to add new blocks to a blockchain network, making the process time-taking and expensive. Excessive mining activity has also been criticized for using too much energy and contributing to climate concerns.
PoS requires only a fraction of the energy required in a PoW system to add new blocks to the blockchain network, making it more scalable and efficient.
What Exactly Is Proof Of Stake?
Cryptocurrencies do not rely on any central authority that checks and validates transactions. Instead, the blockchain network relies on individual nodes to verify transactions. The nodes in a blockchain network have to agree on the present state of the blockchain after a transaction has been made, effectively validating the transactions.
Blockchain networks use several methods to reach a consensus to validate transactions. Proof of work used to be the most common method, but it is widely being replaced by the PoS model. PoS is more efficient, and it lets participants earn rewards on the cryptocurrency tokens that they stake.
Staking rewards are an incentive that blockchain networks provide to their participants. Every blockchain network has set a number of rewards for participating members for validating blocks of transactions, and the amount you earn can be different, depending on the blockchain network’s protocols.
Wrapping It Up
Understanding what crypto staking is and how it works clearly highlights several possible benefits of taking it on. Think about it: Crypto staking is an easy way to “earn interest” on your cryptocurrency holdings.
Validating blocks on the blockchain network is not a process that you have to perform manually. You’re just staking your holdings to facilitate the process, earning tokens by making your cryptocurrency holdings work for you. You do not need to do any work yourself or lend your computational power with specialized hardware like with cryptocurrency mining.
Depending on the cryptocurrency network you are using, you can stand to earn a significant amount of tokens through cryptocurrency staking.
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