Staking is a simple way to earn passive income, just by holding coins. This is possible due to the structure of the blockchain, which allows the system to reward users for helping to validateand to support the network with each transaction verification. It does not carry the risks of mining, but at the same time, the profits are much lower in comparison.
What is staking?
To make it simple, staking consists of buying and storing cryptocurrencies in a wallet. We could therefore say that the process is very similar to Hold, with the difference that in staking, the balances are blocked, so we cannot use them.
As we already know, within a blockchain, transactions must be validated by consensus. To carry out the validation of each block, the Proof of Work (PoW) consensus protocol requires powerful computers that consume a lot of energy.
Whereas in Proof of Stake (PoS), block validation does not occur through mining, but is performed by the nodes that have cryptocurrencies in their possession. Proof of Stake nodes are known as validators, and they are responsible for validating and confirming the blocks.
Bitcoin uses Proof of Work (PoW) to mine blocks and validate transactions, while other cryptocurrencies, such as Dash, Zcoin or ARK, use Proof of Stake (PoS). Staking therefore contributes to the operability and proper functioning of the blockchain. We could say that staking is based on Proof of Stake.
In both PoW and PoS, the main objective is to reach network consensus to validate transactions, but the way each process occur is completely different.
What do I need to be a staking validator?
To become a validator, you only need to obtain a cryptocurrency that allows this process and an official wallet to carry out the action.
The blockchain chooses the validator nodes randomly, although it should be noted that nodes with a higher number of cryptocurrencies are more likely to be called upon to validate blocks. Some of the cryptocurrencies that can be used for staking are Tezos or ICOIN.
This process is very similar to having a savings account that earns interest over time. Staking incentivises users to keep their funds saved to get the backing of the network, which will allow them to make profits. During the process, the wallet must be online 24 hours a day, unless you are cold staking.
Types of staking:
- Staking groups
This method contributes to decentralization by allowing all users (regardless of the number of coins) to participate. These are groups of users who jointo have a larger amount of funds and thus achieve greater staking power. In staking groups, each participant puts in a certain amount, and the reward is received in a way that is equivalent to the money contributed. It is a good method for beginners.
- Cold staking
In this method, staking is done from a physical wallet (hardware) and with no internet needed. This is attractive for many users as their funds will be safe (they are offline). It’s a method designed for those who have many cryptocurrencies, and as its offline, the user will not have to fear the loss or theft of their cryptos.
- Staking providers
Staking providers are staking services for cryptocurrency users. Although it can sometimes be more profitable to do staking directly, stake providers often have the advantage of having large staking pools. As a general rule, stake providers take a commission from the reward.
Advantages of staking
- It is not necessary to have powerful hardware or specialised mining equipment.
- The energy expenditure is lower compared to the energy expenditure used in mining.
- There is a greater scalability of the network thanks to the generation of blocks through staking.
- The more coins users have staked, the more likely they are to be called upon to validate blocks and earn more profit.
- Cryptocurrencies in staking do not devalue over time (as is happens, for example, with mining equipment).
Disadvantages of staking
- It is inappropriate to think that staking will lead to very large profits. The rewards are often low compared to the rewards of block mining.
- The use of staking providers allows our coins to be in the hand of third parties.
- In online staking, security is not guaranteed as any hacker can get into the wallet and withdraw the funds.
- Decentralisation can be at risk, as power is concentrated in the hands of a few.
When staking, it is important that the user studies the environment and the market. A good basis of learning and information is important when making decisions and when choosing the right cryptocurrency. It is not good to get carried away by the experiences of others, but it is better to study our movements beforehand, making calculations of the investments, the return, and the time it will take us. It should be kept in mind that each blockchain has different rules for its cryptocurrencies, so it is essential to be familiar with the currency you are going to choose.
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