So what is staking?
02.11.2021 • Просмотров:

So what is staking?

By bit.team

In the most general sense, cryptocurrency staking offers rewards by storing certain cryptocurrencies. However, staking is much more than just the definition given here.

Before delving into the understanding of cryptocurrency staking, it is reasonable to ask the question: is it worth it?

In fact, staking has recently witnessed significant growth with periodic spikes in the number of users delegating cryptocurrency to receive rewards for yield or a fixed percentage. In addition, the number of miners associated with PoW began to decline sharply.

In fact, major exchanges such as Coinbase and Binance, which provide staking services to users, can reach an APY of up to 30%. Thus, it is quite obvious that such exchanges store a huge amount of cryptocurrencies that are used in staking.

As of September 2021, the total value of assets placed on the Binance Smart Chain is more than $6.1 billion. In addition, the total value of assets placed in DeFi or TVL protocols (total blocked value) is more than $86.59 billion dollars. Thus, you can clearly notice a significant increase in demand for cryptocurrency staking, which causes a lot of discussions about this.

Now that you know about the need for staking, you are obviously wondering what is it?

This is a process in which users will lock their funds in a crypto wallet to participate in the maintenance of transactions in the blockchain network with a Proof-of-Stake (POS) consensus.

You can find some similarities between staking and mining cryptocurrencies, as both of them help in reaching consensus. At the same time, both staking and mining involve rewards for participating users. Staking is similar to placing money in a bank to receive “interest” or remuneration for deposits.

From a technical point of view, users will delegate a certain number of tokens to the blockchain management model, thereby withdrawing tokens from circulation for a certain period of time.

The protocol of a particular blockchain network blocks the investor’s holdings, as well as money deposited in a bank. The investor’s assets blocked in the protocol offer the network many benefits. Firstly, the delegation of cryptocurrencies can increase the value of tokens due to the limited supply. In addition, it also allows the use of tokens to manage a chain of blocks with networks using a Proof-of-Stake consensus mechanism.

The difference between staking and mining

Having a clear idea of “what cryptocurrency staking means”, you could most likely wonder about its uniqueness. How does it differ from the mining process used to verify and confirm transactions before adding them to the block chain?

Their main difference is largely focused on the basic blockchain consensus mechanism used to verify transactions. Mining is commonplace, in the case of the Proof-of-Work or PoW consensus mechanism that is used in Bitcoin. On the other hand, staking is ideal for blockchain networks with Proof-of-Stake or PoS consensus mechanisms, as in the case of Decimal Chain (DEL).

Let’s look at the following differences between mining and staking before understanding how staking works.

  • In the case of mining, miners have to solve several complex mathematical problems. On the other hand, stacking involves nodes in the network participating in the verification of new blocks, blocking their assets.
  • The first miner who solves a mathematical puzzle gets the right to add a block to the blockchain through mining. However, the nodes provide validation of the new block by locking their own tokens in the smart contract.

Mining is focused on the need for specialized equipment, such as a graphics processor, capable of consuming a huge amount of energy. Staking is a more environmentally friendly alternative, with more than 99% energy savings.

Another important difference between mining and stacking is the requirement for more computing power. Higher computing power or resources in mining can increase the chances of solving complex mathematical problems to add blocks to the network and receive rewards. Nevertheless, staking, in fact, focuses on the number of embedded tokens or stored value, as an important factor for choosing as a validator for the network. Users with the largest number of their own tokens are more likely to take on the role of verifying new blocks.

The work of staking

The next important factor will lead us to his work. The process begins with the purchase of a certain number of tokens in the blockchain network. At the same time, you should also note that staking is only possible with blockchain networks that support Proof-of-Stake of PoS protocols and Delegated Proof of Stake (DPoS).

After you have purchased your own network tokens, you should block them in the protocol using the procedure proposed by the network developers. As a rule, you can find a plausible answer to the question of whether it is worth delegating to staking by thinking about the simplicity of concluding transactions. All you have to do is follow the wallet instructions to complete the staking transaction. a striking example of simplicity and accessibility can be SpaceBot, a mobile application for staking.

In addition, you can also find features such as staking pools on cryptocurrency exchanges as flexible tools. Such types of functions are aimed at increasing the number of rewards due to cryptocurrency staking in a particular network. How? This process helps to increase the number of coins blocked on the network at a certain point in time.

As a rule, the nodes with the largest number of coins delivered will receive more transactions to verify. Thus, the ranking of nodes when placing the stack will depend on the number of tokens held by each node. Thus, nodes with more tokens are more likely to receive better rewards. This is one of the reasons why pools have recently gained significant popularity.

Users can also choose a different approach for placing cryptocurrency with a fixed approach. A fixed staking process assumes that users delegate tokens for a certain period. In addition, some providers also offer more flexible approaches with flexible rates that allow users to withdraw their tokens at any given moment. However, tight conditions with fixed rates usually lead to higher interest rates, while flexible rates offer less attractive returns.

Advantages and risks

Having a clear idea of what staking is, the differences between it and mining, as well as its work, let’s move on to the next step. You need to know about the advantages that the possibility of using this technology gives. At the same time, you should have a clear understanding of the risks associated with cryptocurrency in order to make the right decisions before delegating to staking.

Advantages:

  • The best return

The main advantage of staking is the opportunity to earn more cryptocurrency compared to mining. You can discover some of the most generous interest rates from 10% to 100% per year.

  • Resource efficiency

The next important advantage of cryptocurrency staking reflects the resource-efficient nature of the process. Users do not need expensive equipment for cryptocurrency staking. If you have a blockchain protocol that supports the Proof-of-Stake model and offers your own tokens, you can participate in it.

  • Limited environmental impact

Staking may also be the best argument in favor of adopting a cryptocurrency with a limited impact on the environment. Thanks to a significant reduction in energy consumption and the use of computing resources, it offers an environmentally friendly alternative to crypto mining.

  • Participation in the network

Most importantly, betting on cryptocurrency also determines the unique role of users in the management and security of the underlying blockchain networks. Users get the right to check and add transaction blocks to the blockchain network (in the case of a validator). Therefore, you will have a crucial role in maintaining the performance and security of the underlying cryptocurrency blockchain network.

Risks

Cryptocurrency staking also has certain disadvantages that users should beware of.

  • High price volatility

One of the biggest risks is the high volatility of cryptocurrency prices. As a result, you can risk huge losses in the event of a drop in the prices of the delivered assets. In such cases, the price drop may exceed any amount of interest received from the assets.

  • Blocked assets

The process requires the blocking of crypto assets for a certain time. You cannot do anything with delegated assets during the period of time that the assets are blocked in the staking.

  • Loss of control

In addition, another serious risk arises from stacking. If you want to remove the limits of crypto assets to re-trade them, you will have to wait for the minimum blocking period. The blocking period can be seven days or more, and in some cases the entire process of withdrawing bets may take longer.

  • Additional fee

Another serious risk in the case of staking is directly manifested in the addition of commissions. If you choose exchanges, you will have to pay a certain commission for staking. At the same time, commissions will vary significantly from exchange to exchange, and usually amount to a certain share of the reward for staking, which negates all your efforts and expectations.

Summing up

Cryptocurrency staking has definitely become an attractive opportunity for crypto investors to get a promising profit from their cryptocurrency savings. You can think of it as something similar to working with stocks or bonds, with high dividends. The attractive profit from the placement of cryptocurrency tokens has led to the attraction of billions of dollars in this industry.

In addition, PoS protocols also play a crucial role in solving environmental problems associated with some networks. On the other hand, staking also involves some notable risks, such as the possibility of losing coins in the wallet. Therefore, it is important to assess the risks and benefits that you can get from staking based on various factors.