What is cryptocurrency staking?
Many people think of staking as a method that can be used instead of mining. Staking is the name given to the process in which you keep your funds in the crypto wallet. This helps the blockchain network because when you hold an amount in your wallet, the process of the blockchain network gets better and helps make it more secure. So, if you want to understand this in a most simpler way, then think of it as when an individual locks cryptocurrencies, he or she will receive benefits from it. This procedure is called staking.
Many people use and recommend a trusted wallet, which is an example of a cryptocurrency wallet through which you can stake coins. When you use a crypto wallet, it makes the process much simpler and quicker. Another option is to work with an exchange as there are lots of them who offer customers staking resources. A good example is Binance staking. For this to work, it just requires you to keep your amount with the exchange, and this gives customers the chance to receive rewards. This will be discussed further.
A very important part of staking is PoS, which stands for Proof of Stake, and once you understand this, you will get what is staking all about. Think of PoS as a process that helps blockchains. Due to PoS, a minimum amount of decentralization continues while blockchains are continuing to work at a higher level. Let’s take a look at what is meant by PoS and the way that staking works.
Proof of Stake
For those of you who are familiar with Bitcoin will already know about PoW to some extent. Those who have not heard about it do not need to worry as you will get the chance to learn now. PoW stands for Proof of Work, and it is just a process that helps create blocks, which are made up of transactions. Then a blockchain is created by linking each of these individual blocks together. But there is also a twist in this, as miners are involved. This means that it is an activity in which many miners compete against one another to solve a difficult mathematical equation. The person who wins, which is the individual that has solved the equation first, is then granted the right to make an addition to the blockchain. So whatever block is added to the blockchain is by a miner who has won the competition amongst others by completing an equation.
Consensus is a very important part of this whole process of PoW. When consensus is mentioned in this field, it refers to the process which assists machines and users in working collectively in a separate surrounding. So you may question how consensus and PoW are related? Well, you see, the process of PoW is very durable, and it has proven to help consensus through a decentralized way. But these problems that the miners solve are very random and are only created to protect the network. Other than offering security, there is no other use. However, this process makes the whole procedure expensive and complicated.
Therefore, there is an alternative that customers can choose, which is PoS, and like mentioned earlier, all you have to do is keep your coins secured in one place. Then the system grants each individual the chance to add a block to the blockchain after a certain time period has passed. You can increase the chance to be chosen to add a block if you have a lot of coins locked. So the person who manages to hold more coins has higher chances of being chosen.
Whereas PoW is focused on miners being able to solve hash equations, PoS focuses on who has more coins locked. This process is, therefore, mostly preferred because individuals who are interested in cryptocurrency staking do not have to be able to solve hash problems. It can also be stated that the scalability increases when blocks are produced by staking. This is why Eth 2.0 has been introduced. This consists of some technical developments that will change the network of Ethereum from PoW to PoS.
The person behind Proof of Stake
Scott Nadal and Sunny King are the two people that have been mentioned in relation to PoS. This appeared for the first time in 2012 when a work by these two was published on Peercoin. In their words, PoS is a design of cryptocurrency which has been inspired by the BItcoin that Satoshi Nakamoto made.
Peercoin is a network that had the hybrid POS/POW incorporated into it before it was launched. The purpose behind having POW was to stamp the first supply, but it did not last for a long time because the network did not require it on a long-term basis. With the passage of time, it proved not to be as efficient either. Therefore POS is the leading process on which the network was mainly dependent. It helped increase the security of the network.
Delegated Proof of Stake
In 2014, Daniel Larimer had developed a system that was opposite to POS. This was DPOS which stands for Delegated Proof of Stake. In the beginning, Bitshares Blockchain had incorporated the DPOS system, but as time went on, other networks also started using it. Two examples are EOS and Steem, which are networks created by Daniel Larimer too.
The good thing about DPOS is that its users can get the chance to transform their coins into a form of votes. This means that rather than holding coins or staking, they can just depend on voting power. The voting power will then be measured up against votes. But a lot of people might be confused as to how votes can help? Why have votes been chosen rather than holding coins? DPOS has proven to increase security still offers consensus too, and the way it works is that the votes that these individuals collect are used to choose people or delegators that take care of the blockchain. This means that the delegators who will be selected will be in charge of monitoring the blockchain, but they will represent the voters too. Therefore when the time for rewards comes, it is made fair too. The electors of delegators receive rewards according to what their contribution was. This way, a level of fairness is maintained, which ensures everyone gets their due amount.
Another benefit of DPoS is that even when the number of nodes that are validated is extremely low, the consensus can still be allowed. This is extremely beneficial because when the consensus gets to exist, then the network is more efficient, and its performance increases too. Another factor that gets affected is decentralization. The level of decentralization will decrease because the network will be dependent on validating nodes that are small and belong to a specific group. The purpose of validating nodes is that they are in charge of monitoring the operations and checking whether the ruling of blockchains is going fine or not. These nodes are also a part of many procedures and speed up the process of reaching a consensus, and help create the parameters of governance.
But if all of this sounds too complex and has just confused you, then here is a simple way to understand what DPoS really is and why it is significant. This mechanism helps users depend on other members so that their power can be delivered to everyone on the network. So, although DPos is an alternative to PoS, it has proven to be a good option because many networks have implemented its model.
What is the process of Staking?
Two types of blockchains have been discussed above. The first one is PoW. Proof of Work is a model of blockchain that depends on a process called mining, through which new blocks can be added onto the blockchain. Then the second type we have discussed is PoS, which is Proof of Stake. This process is based on staking, which helps to make new blocks that can then be added onto the blockchain once validated.
Staking is a process that consists of validators, and this helps to secure the coins so that individuals can be chosen once a certain time period has passed. Whoever gets selected by the protocol is granted the right to make a new block. Another factor that helps increase the chances of individuals being chosen is by locking up more coins. So whoever secures more coins is more likely to be chosen by the protocol to be the new validator of the next block.
This way, individuals do not have to use mining hardware like ASICs, which is specialized hardware for mining. Such types of hardware then require really large investments that too in a cryptocurrency. But by choosing PoS, you can opt-out of having to use hardware to mine so that you can add blocks. So those that choose PoS will be considered PoS validators, and this way, they get the chance to stake coins. The higher their stake is, the higher the chance to be the next validator. Therefore, you just have to keep in mind that the security of the network is maintained by the motivation that validators get by staking. And if validators do not stake, then it threatens everything.
Another thing to keep in mind is that every PoS blockchain consists of a unique staking currency. There are a couple of networks that adopt the system of two-token. This means that when rewards are rewarded, it is in the form of a second token.
Just think of staking as a method that consists of keeping your coins in a wallet. This allows random people to carry out network functions so that they can receive staking rewards. Or it can also consist of including funds to the staking pool. This will be discussed later on.
Calculation of staking rewards
There are many different types of coins that offer to stake. Every coin offers different rewards. That is why we can’t tell a fixed amount of reward. But what we can do is mark some of the factors which decide the number of rewards that the user is going to get.
These points include the number of coins that the user is staking. For example, if a trader is willing to stake a higher amount of coins, then the reward will be comparatively higher than the one who is not staking many coins. Another point that influences your staking reward is the experience of the trader who is staking, which means if a trader is staking on a particular platform for a long time, so the reward is going to increase as well as compared to the one who has just started. Other than these factors, there are many other factors as well, like the rate of inflation, the total number of coins that have been staked on a particular network, and many more factors as well.
However, the amount is not fixed for staking rewards, but still, there are some of the coins which are offering a predetermined percentage of rewards. This percentage helps traders to get an idea in advance of what amount they will get by staking coins. This is the reason why most of the traders prefer this method because if a trader is going to get a reward on the basis of blockchain or getting his new block added to the chain, then it is not likely to get accomplishment every time. Rather traders ask platforms to give a fixed reward which they know they are going to get in any situation.
Explaining staking pool
Many of the traders must have heard of the term “staking pool.” But not everyone is aware of what it is or how it works. To explain this method to you, I have done the research and tried to simplify it in order to make you understand the staking pool more easily. This is a method that is used in blockchain technology where traders try to add new blocks to the chain, but it is not easy to add them as an individual. Hence what traders do is they combine their staked coins and then try to add another block to the chain, which is not beneficial and easier for everyone, but it also helps a pool to increase the chances of validating the next block to the chain.
This method of pool staking has benefitted many traders as it creates convenience for the individuals who are looking to validate new blocks. Even though it creates an opportunity for the individuals to stake pools, we should know that setting up a pool for staking is not an easy job at all. It requires a very big investment, and experienced developers can only make pool services. And no one provides services for free. That is why a small amount of rewards that a trader gets from pool staking is charged by the developers who created that pool. But this fee is not that big, and it confuses traders as to whether to stake in the pool or not because the convenience and opportunities that it provides are totally worth spending such a small amount of reward.
Cold Staking
This is a process that is not dependent on the internet but still stakes on some wallets. One of the ways to do it is by using a wallet that is air-gapped software or by hardware wallet. There are many networks that you will come across which support cold staking, and these networks allow their customers to stake safely. To ensure the security of their customer’s funds, they are held offline. But if a customer moves the coins from cold storage, then no rewards are given.
Stakeholders that are really big are usually ones who find cold staking beneficial because this option helps to keep funds secure while still helping the network.
Staking on Binance
Talking about some of the best crypto exchanges in the world of crypto, Binance is probably on the top of the list. There are dozens of reasons why Binance is the most popular and preferred platform. And Binance has recently offered a staking option to its platform where traders can stake eligible coins very easily. The platform provides an extremely easy and efficient way to perform pool staking, which can help you validate the next block. But not only does Binance provides you the platform to stake, but it also makes it extremely easy for the traders. You just have to stake the POS coins that you own, and the rest of the work is managed by the exchange itself. To motivate traders and give them advice on what coins to stake, Binance is providing a separate section on its platform where traders can see the history of coins staking rewards to help them decide which coin has the most potential.
Conclusion
Crypto trading offers a very promising future to traders by investing their capital and skills. But as the world is progressing, new methods in the world of crypto are being added, and crypto staking is one of them. It is an extremely easy and convenient way to earn some profits without going through much of the work. POS coins are no doubt one of the best ways to earn some extra bucks, which you can use for yourself.
