Understanding the ins and outs of cryptocurrency can be confusing, but we are taking it slow with our Understanding Crypto series. The next installment of the series is the important concept of staking.
Definition
Put simply, staking is the process of purchasing and holding cryptocurrency in your e-wallet(explanation here) in order to earn profits from it. This is not so different from staking in other contexts, but some people have been able to use it to make a lot of money when the value of the coin goes up. Staking is similar to mining, though it is far less intense.
The difference between mining and staking is that mining relies on the effectiveness of participants to solve hash challenges(proof of work). With staking, a participant can potentially have a higher chance of creating a block when they have more coins locked with proof of stake.
What is Proof of Stake?
Proof of stake (PoS) is a very important concept to understand when considering staking. PoS is when participants lock coins, the protocol randomly assigns the “right” to one of the coins in order for the next block on the chain to be validated. This happens at random intervals, so the more coins someone has locked, the higher the chances of this happening.
How Does it Work?
This is a fairly complicated process when we look at the concept in depth, but staking is basically when a user keeps their funds in a suitable wallet. When certain network functions are completed, the user can be paid in staking rewards.
Each blockchain network has its own list of rules and staking regulations, and each one offers different rewards based on the completion of different functions. For example, some networks only determine staking rewards as a fixed percentage. This is based on public information, so it can be easier to get into.
Terms to Know
*Staking Pool: A group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. (via binance)
*Cold Staking: The process of staking coins on a cold wallet. A cold wallet is a wallet that is not connected to the internet, and is essentially a hardware wallet. Learn more about wallets in our e-wallets blog post!
*Block Reward: Refers to the cryptocurrency rewarded to a miner when they successfully validate a new block.
As most of our “Understanding____” series articles are, this is a basic overview of the topic. Please consult other sources and invest responsibility.
