What is staking?
Like so many technologies in cryptocurrency, staking can be a complicated concept or a simple one depending on your level of understanding. For beginners who are new to cryptocurrency and looking to earn some rewards from staking, it is important to understand at least a little bit about how it works.
For many traders, investors, and crypto enthusiasts, staking is simply a means of earning rewards for holding or keeping certain cryptocurrencies for some time.
staking can be described as a less expensive alternative means to “mining”. It involves holding funds in a cryptocurrency wallet to support the security and operations of a particular blockchain network. In other words, staking is the act of locking cryptocurrencies to receive profits or rewards.
In most cases, an individual can stake coins directly from his crypto wallet, such as the Trust wallet. Nowadays, many exchange platforms offer to stake services to their users. Popular exchanges like Binance, HaggleX, and Coinbase allow you to earn rewards in an utterly simple way; all you have to do is hold your coins on the exchange. With the HaggleX wallet, users will be able to stake BTC, ETH, EOS, HAG, and all the coins supported by the platform.
How does staking work?
When you own a coin that allows you to stake, e.g. Teos, Cosmos, and now Ethereum (through the new ETH 2 upgrade), you can stake some of your holdings and earn a percentage reward over time depending on their rate. This process usually takes place via a “staking pool”.
Staking is a similar form of a savings account geared towards making interest. It is a similar form of PiggyVest, a platform in Nigeria that allows you to earn interest while you save your money with them for a while.
Like in the traditional banking system, you earn rewards for staking because the blockchain puts your coin to work. Cryptocurrencies that allow staking use a “consensus mechanism” known as proof of stake, a medium they use to ensure all transactions are verified and secured without the influence of a third party (a bank or any other payment processor).
Why do only some cryptocurrencies have staking?
- This question might be a bit technical to understand. For example, Bitcoin does not allow staking. To understand the reason behind this, you need a little bit of background.
- Cryptocurrencies are decentralized, meaning there is no central control behind the way it works. Many people wonder how the computers in a decentralized network arrive at the correct answer without the influence of a central authority; this is possible because they use a ‘consensus mechanism.’
- Several cryptocurrencies, including Bitcoin and Ethereum 1.0, use a consensus mechanism called Proof of Work. Via Proof of Work, the network disseminates a large amount of processing at creating solutions. Some of the problems solved by this network include validating transactions between strangers from different parts of the continent and ensuring that nobody is trying to spend the same money twice. Miners worldwide compete to be the first in solving a cryptographic puzzle as part of the process involved. The winner of this competition earns the right to add the latest block of verified transactions to the blockchain and gets some cryptocurrencies as a reward.
- Depending on the project, the exact implementations may differ, but more importantly, users sacrifice their token to add a new block onto the blockchain to get a reward in exchange. The tokens staked by these users act as a surety that any new transaction they add to the blockchain is legitimate.
- The network usually chooses validators regarding the size of their stake and the duration of time the coin was held. The most invested participants are rewarded. Sometimes, slashing events might occur if transactions in a new block are invalid by users.
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