THE TECHNOLOGY OF STAKING CRYPTOS AND HOW IT WORKS
2022 is gradually proving to be the year of cryptocurrencies as the push for decentralization continues. Therefore, it is wise to understand all the technical terms involved to help you articulate the reasoning behind your crypto investments. If you are an investor in cryptocurrency, you must have encountered the term crypto staking.
What is staking cryptocurrency?
Staking is a process that crypto platforms use to verify their transactions, allowing the participants to earn rewards on their holdings. In other words, you commit your crypto assets to confirm transactions and support a blockchain network. The process is a great way to earn passive income and is available with cryptocurrencies that use the proof of stake model in processing payments.
Ideally, the more the staking, the more robust the cryptocurrency blockchain becomes. In return, the network rewards you with more coins for staking, which improves its reliability. By staking cryptocurrency, you earn interest or passive income by simply clicking a button and walking away.
Staking cryptocurrency is a more energy-efficient model than proof of work which requires mining machines that use a lot of computing power to solve cryptographic puzzles. The good news is that some cryptos, such as Avax offer high interest for staking.
How the staking technology works
With cryptocurrencies based on the proof of stake model, transactions are added to the blockchain via staking. Participants first pledge their coins to the crypto protocol for the process to work. Then the protocol selects validators to verify transaction blocks from those participants. Ideally, the more coins you pledge, the more your chances of being selected as a validator.
When a validator verifies a block, and it is added to the blockchain, new cryptos are minted and distributed as staking rewards to the specific block validator. The reward is the same type of crypto the participant stakes, although some blockchains use a different type of crypto as rewards.
For beginners, you must hold crypto that uses the proof of stake model for you to stake. Maybe you wonder if you lose your coins when you stake. No, your coins remain in your possession even when you stake them. What happens is that you simply put the staked coins into work, and you are free to withdraw them whenever you wish. However, the withdrawal may not be immediate, with some blockchains stipulating a specific minimum period for staking coins.
Keep in mind that not all cryptos use the staking model. Some use the proof of work model that requires substantial computing power to mine the cryptos. Most of them have been criticized due to environmental concerns.
Benefits of cryptocurrency staking
- It is more environmentally friendly than crypt mining.
- As a participant, you contribute to maintaining the efficiency and security of the blockchain.
- It is a great way to earn passive income on your crypto holdings.
- Unlike crypto mining, you don’t require any costly or energy-consuming equipment for crypto staking.
The primary advantage of staking cryptocurrency is that you earn more coins, and the interest rates are very favorable. It is a great way to invest your money, and the only thing you need is a crypto that uses the proof of stake model.
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