Crypto Staking is a very important concept in the cryptocurrency world. Staking is how cryptocurrencies verify each and every transaction. The process involves the trader putting their assets into a blockchain network, which confirms the transaction.
Staking is only available with cryptocurrencies that work under the proof of stake blockchain and not proof of work. Any cryptocurrency that uses proof of stake is initially how transactions get added to the blockchain network. Any block that gets added to the blockchain results in a new coin being mined and then distributed as a reward for staking. The reward is given to the block validators and is usually the same type of crypto being staked. There are random cases in which the blockchain will reward different crypto.
For somebody to stake crypto, they have to own a cryptocurrency under the proof of stake model. They can then choose the amount for staking through any crypto exchange. When you stake your coins, they remain in your custody. You’re putting those staked coins to work, and you may unstake them at any time if you want to exchange them. The unstaking procedure may take some time; certain cryptocurrencies require you to stake coins for a set period of time.
Although it is possible to stake under the proof of work model, it is better not to. The proof of work model staking requires a lot of energy and computing power. Proof of work has led to high energy usage, particularly the number one cryptocurrency, bitcoin. They have been criticized for the excessive amount of computing power and the environmental concerns it brings with it.
Of course, just like with everything, there are benefits and risks. Firstly, let’s discuss the benefits of staking crypto.
Benefits:
Staking is a relatively easy method to earn interest on your crypto assets.
Crypto staking doesn’t require any equipment, whereas crypto mining does.
By staking cryptocurrency, you’re helping secure the blockchain and keeping its efficiency functional.
Crypto mining, as we know, uses a lot of energy, whereas crypto staking does not. This makes staking much more eco-friendly.
The most important benefit of staking is that interest rates can potentially gain you more crypto. It can be a fairly profitable way to invest your money. By staking, traders are also supporting the blockchain.
Risks:
Due to the volatility of the crypto market, if the assets you have staked experience a significant price drop, it can make you lose all the interest you made on them.
When staking your crypto, you are often forced to lock them up for a set period of time. The lock up period prevents the trader from selling their staked assets which for some can be a problem.
If a trader is looking to unstake their assets, the unstaking period can last for seven days and, in some cases, longer than that.
The most common risk that comes with staking is the price drop. Beware of the prices listed, some crypto projects may list high rates to attract investors. Don’t fall for that because, in most cases, the prices can crash quickly.
Why are all cryptocurrencies not under the proof of stake network?
For staking to be possible, the asset must be under the proof of stake netowork. If the cryptocurrency is not under the proof of stake, staking will not be possible. The other network that cryptocurrencies can be under is proof of work originated by Bitcoin. Proof of stake was only introduced in 2012 by Peercoin.
Which is more secure?
There has been debate as to which network is the safest option. Proof of work requires the most computational power and energy; however, it makes the blockchain network secure and difficult to attack.
Another less common mechanism is proof of burn. This network requires miners to burn or destroy crypto to validate transactions.
When is best to stake?
If you are holding cryptocurrency that you aren’t planning on trading then staking is best option. It is considered long-term trading. In regards to the investor, it doesn’t require work on their part. It will only benefit and gain the investor profits over time.
Both cryptocurrencies and crypto investors have benefited from the proof-of-stake approach. Proof of stake allows cryptocurrency exchanges to handle huge numbers of transactions at low costs. Cryptocurrency investors can also earn passive income from their investments.
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