To get a better grasp of staking, we need to see why blockchain needs these types of consensus mechanisms. Additionally, it’s essential to take a look at the concept of Proof of Stake mechanism (PoS) and how it works. Don't worry; you don’t need to trawl the net to find out about these. Cryprologi.st is here to take your worries away! All about PoS is just one click away.
PoS was created as an alternative to PoW (Proof of Work), which was the first consensus algorithm used in blockchain to make the process of verifying blocks more efficient than PoW. To learn all about PoW, check here. PoS was introduced in 2012, and Peercoin was the first cryptocurrency project to implement a form of Proof of Stake proposed by Sunny King and Scott Nadal. Now that we found out where PoS comes from let's delve into staking!
In simple terms, staking refers to holding coins for a fixed period to earn interest and passive income. It is commonly used in blockchains and DeFi ecosystems. Everyone can mine or validate block transactions based on the number of coins they hold. However, it should be noted that if you want to stake crypto, you need to own a cryptocurrency that uses the Proof of Stake algorithm since staking operates on the Proof of Stake frameworks. Proof of Stake (PoS) assets like Solana, Tezos, etc., let you earn rewards on your staked assets.
The process of staking your coins is similar to putting some cash into a bank to save it and earn profits in the long term but with some differences. It allows you to participate in validating transactions and get rewarded by staking some coins. In most cases, the rewards are the same cryptocurrencies that participants are staking (e.g. you’re given BTC if you stake BTC). However, some blockchains use a different type of cryptocurrency for rewards.
While coins are being staked, they are frozen in a wallet. Wallets?! Oh, wait, first read here to learn about cryptocurrency wallets and their categories. Offline staking is another word for cold staking, and as the name suggests, it refers to the time when users decide to start staking their coins in an offline wallet (cold wallet). In the cold staking, the wallet is not connected to the blockchain network. Cold staking is inherently safer than staking and prevents online attacks due to holding the coins in cold (offline) wallets.
Both these terms refer to the process of adding blocks to the blockchain. But what makes them different, and what separates the two? The answer lies in the algorithm they use to validate transactions before adding them to the blockchain. As we learned in this article, mining comes from the heart of Bitcoin and PoW that requires miners with powerful computers to solve the puzzle and validate transactions. However, staking is the core of PoS and speaks of locking coins on the blockchain network and, similar to the PoW, results in adding new blocks to the blockchain.
The whole idea of a staking pool is similar to the mining pool, where we have a collective of stakeholders to increase the chance of being rewarded. Typically, the more coins locked up, the higher the chances of earning block rewards. Simply put, a staking pool is where a group of coin holders join each other and combine their resources (staking powers) to verify and validate new blocks to get more rewards. One advantage of staking pools is you can deposit less than the minimum staking amount as all of the coins are put together.
Joining a staking pool or staking through an exchange are two common ways to stake your crypto. Let’s see how each one works.
Realising the advantages and disadvantages will aid you to make confident decisions before making any steps towards crypto investing. Let’s check the top pros and cons of staking together.
Although the crypto you stake is still yours, you need to unstake your crypto to make it tradeable again, and it takes some time. For instance, it takes three days (72 hours) for the EOS blockchain.
The amount of rewards that users gain within the staking process depends on the volume of their total holdings and staking length. But you may ask yourself, where do these rewards come from? Every time a block is validated, new tokens of that currency are minted and distributed as staking rewards. These staking rewards are also known as inflationary rewards to incentive validator nodes to validate the blocks.
There is no certain answer to this question since every blockchain network may use a different way to calculate staking rewards. For instance, in the Ethereum blockchain, users must have at least 32 ETH to stake and become a validator independently. Take heed that the more validators participate in staking, the smaller the proportion of the reward will be.
Earning passive income in crypto has no end! Plus that there is another available option to gain assets. DPoS (Delegated Proof of Stake) is a consensus algorithm developed by Daniel Larimer, the founder of BitShares, Steemit and EOS, in 2014. Like the PoS, DPoS requires users to stake their coins to participate in DPoS. The network users vote and elect delegates to validate the next block. Delegates are also called witnesses or block producers. Let me elaborate on it in the next paragraph.
With DPoS, users vote for the computers they think are qualified enough to run the network. In other words, users vote for electing delegates known as block producers or witnesses. Selected witnesses are responsible for creating blocks by verifying transactions. By verifying and signing all transactions in a block, they receive a reward, which is usually shared with those who have voted for a witness. Additionally, the elected delegates receive the transaction fees from the validated block. The number of witnesses is limitless (most protocols choose between 20 and 100 for each new block). It means the delegates of one block might not be the delegates of the next one. As a result, DPoS increases the speed of the network to reach consensus.
Delegated Proof of Stake is the consensus mechanism used by some blockchain networks, including BitShares, Lisk, EOS, Steem, Ark, Nano, Cardano, Tezos and Cosmos.
Congratulations! Now you’re like having a Master’s degree in staking! Switching from PoW- to PoS-based consensus mechanisms is a practical action to increase the efficiency and speed of the transactions, which is actually happening with the upcoming launch of Ethereum 2.0. By moving the network over to Ethereum staking, the contest of crypto mining vs staking would be more relevant than ever. Staking is a great way to earn passive income, but remember that making passive incomes from crypto using staking or other ways requires you to be aware of all the affecting factors. One of the best ways to keep you updated is to check Cryptologi.st and its hottest news and top coin analyses.
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