What is crypto staking?
Blockchains have one core thing in common - all transactions need to be validated on the chain in some way. Bitcoin as a key example is validated by a process called ‘mining’ which uses a lot of energy. This is called Proof-of-work. But this isn’t the only method to process validations on the blockchain, there is the validation called the ‘consensus mechanism’ one of the most popular being the Proof-of-stake (PoS) mechanism.
PoS is the format for what is more commonly referred to as ‘coin staking’, so how does this work in practice? Well, staking coins on a network gives holders decision power which means you can vote and generate an income. Think of it like earning interest on a savings account for leaving your funds in a bank.
What are the benefits of staking?
As mentioned above, the equivalent in the world of fiat currency is it is similar to earning interest on a bank account or the bank investing your funds on your behalf, but there are other benefits too. With Proof-of-work it is extremely resource heavy not only with continuous use of electricity but also keeping up to date with the latest mining hardware to run on the Bitcoin network efficiently.
A Proof-of-stake method offers guaranteed returns, whereas Proof-of-work works on the basis where coins are rewarded on a random process with quite a low hit rate of being awarded
What are the risks?
Staking coins in a wallet does have a drawback. The coins are locked up for a period of time and cannot be traded.
This may not be a problem while the value of the currency is rising upwards, it can lead to losses though when the price is falling. The amount earned through staking might not be enough to cover the price depreciation during a bear market
So how does it work?
In contrast to just having the coins in your wallet or locking them in a masternode to stake (Smart Contract), some coins also have added randomness to the process of staking and voting so that the users will find it difficult manipulating the outcome in their favour. This process is similar to a lottery in which the number of crypto coins you hold is equivalent to holding a given number of lottery tickets. Staking systems can also allow delegation in which each individual delegates their voting rights and earned income to a trusted party. Those delegates then earn all the rewards for block validation and pay their loyal supporters some form of dividends in return for their vote.
Make sure you do your own research
There are many many coins available which can be staked (PoS) just like it isn’t only Bitcoin that works on PoW. So please do your own research if you are looking to choose a coin to stake and look at the different rewards available, minimum staking amount and rules that they enforce. Look at projects that have potential for longevity as by staking the coin you are helping the team behind the project realise their goals and you can become an early adopter of the project. So make sure you do your own research!