In recent years, cryptocurrency has caught the attention of an increasing number of people from all sorts of backgrounds. Meanwhile, online platforms that allow users to buy, sell, trade, and store different kinds of cryptocurrencies have become more accessible and user-friendly.
If you have spent some time in the crypto sphere or have some friends who are just now getting into the crypto world, you may have heard of the term ‘staking.’ While easy-to-grasp concepts are few and far between in the crypto world, staking happens to be one that anyone can easily understand.
This article will serve as an introduction to crypto staking, outlining what it is, how it works, and what the benefits of crypto staking are. So let’s get into it!
What is Crypto Staking?
In plain and simple language, staking is a form of investing in cryptocurrency. When someone buys cryptocurrency on a regular exchange, they are not investing in cryptocurrency in the same way that stakers are. This is because those who stake cryptocurrency serve a key function in maintaining and securing the integrity of the crypto sphere.
Staking is the act of holding funds in a cryptocurrency wallet in order to support the blockchain. Blockchain is best thought of as a public ledger to which everyone in the crypto sphere has access. This ledger contains a history of all previous transactions up to the present in the form of individual blocks. Each block can be verified by being made a part of the chain of blocks that makes up the chain of cryptocurrency transactions. Hence, blockchain.
Staking is a means by which users can hold cryptocurrency in exchange for other people to use and trade amongst one another. Stakers are given an incentive to do this as they win rewards for the cryptocurrency that they hold. Usually, a user can stake cryptocurrency directly from their crypto wallet. Many exchanges, such as the Binance Chain, allow users to stake cryptocurrency on the exchange and earn rewards in a remarkably simple way.
Staking is a big part of what gives cryptocurrency transactions their credibility, as it helps to maintain the decentralization that is so crucial to the crypto sphere.
How Does Crypto Staking Work?
One way of thinking about staking is that it is a mechanism by which decentralized consensus can be reached about any and all transactions on the blockchain. Another commonly known method of doing this is Crypto mining, which is where miners use computational power and compete with one another to solve a complex mathematical puzzle. Whoever is the first to do this for any one transaction can add another block to the blockchain along with what is known as Proof of Work (PoW).
Similarly, staking is another mechanism by which users can achieve and maintain a decentralized consensus about transactions on the blockchain. In many ways, staking is a much less costly method to do this than mining as it requires much less computational power.
So how do stakers achieve this decentralized consensus? This is where Proof of Stake comes in.
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What is Proof of Stake?
The main idea behind Proof of Stake (PoS) is that it allows users to essentially lock a chosen amount of cryptocurrency, otherwise known as their stake. As part of the staking protocol, these users will have the right to validate the next block randomly assigned to them. Importantly, the probability of being chosen is correlated to the number of coins the user has staked. Therefore, the higher the stake, the greater the probability of being chosen to validate the next block on the chain.
Through this simple mechanism, participants don’t create a block by solving a complex computational puzzle, as in crypto mining. Instead, what determines who gets to validate the block is how many staking coins users are holding.
Many people consider staking to be a superior mechanism to mining when it comes to maintaining a decentralized consensus on the blockchain. This is because staking is a much more easily scalable mechanism. This is one of the key reasons why the fast-growing Ethereum network has announced plans to migrate from a Proof of Work mechanism to a Proof of Stake one. This will be part of upcoming upgrades known as ETH 2.0.
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Benefits of Crypto Staking
Because staking is now a key element in maintaining the credibility and validity of cryptocurrency transactions, crypto exchanges provide several advantages to those who choose to stake cryptocurrency. For starters, staking is incentivized by rewarding crypto stakers for their Proof of Stake. The bigger the stake, the larger the reward, and the higher the probability of getting chosen to validate the next blockchain.
This incentive also helps the crypto sphere in another major way. Through this mechanism, cryptocurrencies can be held on the exchange for longer periods without the need to create more crypto very frequently. This means that assets aren’t subject to begin diluted by inflation, as they can become through the crypto mining mechanism.
The final benefit of crypto staking has already been mentioned once before, but it is so important that it deserves a second mention. This is the fact that staking does not require any expensive hardware to work and can be done by just about anybody with a crypto wallet and some funds. This makes it more accessible to the public, and importantly, much more environmentally friendly than crypto mining.
In this article, we have outlined as simply as possible what crypto staking is and how it works. As you can see, Staking is one example of the many innovations made to blockchain technology that allows cryptocurrency to be exchanged and managed in a decentralized yet trustworthy manner.
Unlike crypto mining, the rewards to be reaped for the average internet user greatly outweigh the risks. As this decentralized financial technology grows in size and scope, it will quite possibly be crypto miners who will be ahead of the race in 5 to 10 years’ time.