Staking and Proof of Stake – What do these terms mean?
In response to the growing demand for energy in the Proof-of-Work protocols, abbreviated PoW, there has been a trend towards staking. In short, staking is the act by which an investor assigns and blocks a certain amount of crypto in a protocol in order to receive rewards in return. Users can secure their network by blocking the token, as a result of which they receive rewards. The higher the amount of staking, the more rewards will be received.
In this article, we will explain in detail and understand the principles, benefits of staking, and what is the staking of cryptocurrencies.
What is staking?
In the crypto industry, staking is the definition of a process that involves the acquisition and locking of a certain amount of crypto, which later becomes a validation node for the network. By keeping these coins, the user becomes an important element in the market and in the security of the network, being thus rewarded. To better understand we take a banking example. As in the case of banks, the income is in the form of interest and the rate varies depending on the network, dynamics, demand, and supply.
Differences between mining and staking
Proof of Stake came in response to PoW. Mining is proof of work, while staking is proof of stake. While mining has as its main purpose crypto trading, staking encourages the blocking of transactions, of some funds. Similarly in terms of mining, solving quite complicated mathematical equations is solved, so that the first one to solve the equation adds another block in the blockchain. In staking, participants create blocks. From an energy point of view, staking is considered more efficient, consuming less energy and not requiring the purchase of special equipment as in the case of mining.
A resemblance between the two processes is the reward. If in the case of miners, the reward is faster with more computing power and they are more likely to solve the equations, in the case of staking the reward is offered by the blocked amount. The higher it is, the more valuable the reward will be.
How does staking work?
The process of a staking system begins with the purchase of a coin that belongs to a certain network. After the purchase, the user must block the coins according to the procedures indicated by the developers of the respective platform. It should be noted that stake can only be done through networks that support this type of protocol called PoS.
In general, the higher the number of coins wagered, the higher the number of transactions assigned to certain nodes. These nodes are classified according to the number of tokens they have. This leads to higher compensation, which is why staking pools have become very popular. They aim to increase the reward of staking by using more coins from multiple users at the same time.
If you simply want to HODL, and also stake, you have an option called fixed staking or flexible staking. In the case of the fixed one, you block a certain amount, for a certain period of time, and in the case of the flexible one, the user can withdraw his tokens at any time. The main advantage of fixed staking is that it has higher interest rates, while the flexible ones tend to have lower ones – though you can withdraw at any time without losing interest.
Conclusion
Stacking cryptocurrencies is one of the most popular ways to get passive income because it gives users the opportunity to increase their profits without any direct involvement.
By staking their coins, users receive both rewards and contribute to the growth and efficiency of the blockchain. In conclusion, you should have a good understanding of how crypto works before you get into locked staking – because if your cryptos are locked you might not be able to take advantage of bull markets (or bear ones). However, flexible staking is usually considered a safer alternative to easily earn passive income on your coins!
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