A simplified look into staking crypto, how it works and its benefits.
Struggling to analyze the industry trends? And, looking for a more secure way to earn crypto? Say no more, it’s time to stake it ’til you make it! This article hopes to unfold what is staking, some of it’s benefits and risks involved.
What is staking?
Simply put, staking is the act of locking cryptocurrencies to receive rewards. Crypto staking involves “locking up” a portion of your cryptocurrency for a period of time as a way of contributing to a blockchain network. In exchange, you can earn rewards, typically in the form of additional coins or tokens.
What is proof of stake (POS)?
During the specific time period, you cannot make any transactions on your staked tokens. It is typically done on blockchains that leverage the “Proof of Stake (POS)” consensus mechanism.
In the POS system, validators process transactions and create new blocks of a blockchain, just as miners do in a “Proof-of-Work (POW)” blockchain (e.g. — Bitcoin). The POS consensus mechanism requires a considerably lower amount of computing power for transaction verification. In turn, this reduces the negative effects on the environment. For this reason, the founder of the Ethereum cryptocurrency — Vitalik Buterin, joined the development of this technology and set a goal to completely transfer his platform to POS system.
How does it work?
There are many ways you can get involved with staking. But, typically the two main ways include either through a cryptocurrency exchange or joining a staking pool.
- Staking on a cryptocurrency exchange
The recommended approach — staking via an exchange essentially allows you to monetize your assets, which would otherwise lie idle in your crypto wallet. The exchange does most of the admin work for you.
- Joining a staking pool
This method allows investors to club their resources to earn collective rewards, similar to a mining pool. An administrator usually overlooks the process to ensure things run smoothly.
What are the advantages of staking?
1. The potential to earn higher returns, in addition to capital gains on your original crypto investment. Interest rates can range from 10% — 40% per year.
2. The ease of facilitating the transaction since it typically does not require any specialized equipment.
3. The POS mechanism requires significantly less energy and computational power as compared to mining.
What are the risks of involved?
1. Like any investment, cryptocurrencies involve a certain level of volatility. So, a drop in the value of the coin, may end up declining interest rates.
2. On the flip side, of earning higher interest rates, it’s important to know that the staked coin will be locked for a specific period during which no transactional activity may be performed.
Given all its advantages, staking is increasingly considered a leading source for generating passive income, if performed appropriately.
In addition to being environmentally friendly, it is cheaper and more scalable when compared to traditional crypto mining, which requires some serious investment and a degree of technical knowledge.
So there’s one last question left…
Should you stake crypto?
As with everything else DYOR (do your own research). The information we provide is never to be taken as financial advice but merely for education purposes.
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