One of the best parts of cryptocurrency investment is the ability to earn crypto while you sleep. It’s the hallmark of investment for anyone - to be able to make money even when you’re not working.
Trading and hodling are always great investment strategies for anyone who understands how the market works, but stalking is fast becoming a norm for investors as well. Below, we’ll look into what cryptocurrency staking is and how it could benefit you.
What is Staking?
To understand staking, it’s important to recall cryptocurrency mining. When it comes to mining, network validators on a blockchain come together to verify transactions and add them to the chain. Blockchain validators - also known as miners - get tokens for their work, and their activities are important to the decentralization and security of the blockchain.
Several of the top cryptocurrencies, including Bitcoin, are obtained through mining. But, as many know, the method has been heavily criticized for being too energy-intensive. Increased competition on a specific blockchain means that you will need to use some more electricity to mine. And some more… and some more. As more miners coming in, more resources are being used.
In truth, this isn’t so sustainable.
Staking is the less energy-intensive alternative to mining that everyone seems to be interested in today. It essentially involves holding and keeping coins in a wallet to support the blockchain’s security and operations. In return, you get rewards in coins after a specific period of time.
Most times, it is possible to stake your coins from your crypto wallet. But, there are instances where exchanges offer staking services to their users. You can use Binance Staking to stake your coins on Binance, and top cryptocurrency exchange Quidax also offers its QDX Vault service to users who would like to stake its native coin, QDX.
Staking is much more convenient than mining; there are no complex mathematical equations to be solved, and all you have to do is keep your coins in a wallet, and you get rewards over a period.
Staking works via the Proof of Stake (PoS) consensus algorithm. It is a type of consensus mechanism that allows blockchains to operate more energy-efficiently while still being decentralized.
In Proof of Work (PoW), transactions are gathered into blocks, and these blocks are linked to create the blockchain. But, besides being energy-intensive, PoW is just too complex. There are so many computations involved, and the puzzles that miners have to solve serve no purpose but to secure the network.
PoS changes all of this. Its primary idea is for participants to lock their coins at particular intervals, and the blockchain randomly assigns the wallet to validate the next block. Your probability of being chosen will depend on the number of coins you stake. So, the more coins you have locked, the higher your chances of being selected.
How Staking Works
So you now know that PoW blockchains need to use mining to add new blocks to the blockchain. On the other hand, PoS chains make and validate blocks through staking.
Thanks to their staking action, blockchains can produce blocks without the need for any specialized hardware. Mining will need investment in hardware, but staking requires a simple direct cryptocurrency investment. The stake is what incentivizes validators to contribute towards maintaining the network’s security. If they don’t, they could lose their money.
Although each PoS blockchain has a special staking currency, some networks use a two-token system where they pay rewards in a second token.
Calculating Staking Rewards
There isn’t a singular approach to calculating staking rewards. Each blockchain is free to use a different method to calculate them. Some adjust rewards on a block-by-block basis, considering factors like
- The period of time where each staker is locking their coins
- The staker’s history on the network
- The total number of coins being staked
On some other networks, staking rewards are determined as a specific percentage. These rewards are distributed to validators as compensation for inflation. Users can spend their coins instead of holding them due to inflation, which means that the coins themselves get more use.
Joining a Staking Pool
Thanks to the growth of PoW coins, mining has become quite challenging. Many miners have developed mining pools to work around this difficulty. They pool their resources together and mine, and they share rewards proportionally.
Staking pools do essentially the same thing. Coin holders gather their resources, so they can increase their chances of validating blocks and getting rewards. By combining their staking power, they can share rewards proportionally based on pool contributions.
Staking pools are usually more effective on networks with high barriers of entry. This way, pool providers can charge a fee for the staking rewards before distributing them to participants. It is also worth noting that staking pools can offer greater flexibility for individual stakers. The coins have to be locked for a fixed amount of time, and there’s usually a withdrawal time that the blockchain sets. Also, there’s a substantial minimum balance that is set to discourage any criminal activity.
Today, most staking pools have low minimum balances, and there are no additional withdrawal times. So, joining a staking pool can be better for new users instead of staking on their own.