Cryptocurrency staking involves holding onto some of your cryptocurrency or tokens to support some type of network operation so that you can get a reward for it.
You can think of it like shareholders in a company. These shareholders hold shares of the company’s stock and therefore get to vote on the directorship and management of that company.
Crypto staking means you hold a certain amount of cryptocurrency in your wallet so that you can support the functionality of a blockchain system. In return, the network will reward you, much like shareholders are “rewarded” as their shares go up in value.
Just as in this example, crypto staking is a way to make extra money when you’re involved in the buying and selling of this type of currency.
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Proof of Stake (PoS) Versus Proof of Work (PoW)
The consensus mechanism used in staking is either a proof-of-stake or a proof-of-work mechanism. Many cryptocurrency companies are moving away from PoW and going with PoS instead. Below are some of the reasons why:
- PoS consensus mechanisms tend to be more secure, in part because they aren’t subject to the infamous 51% attack, like what happened to Ethereum Classic three times in August of 2020. These attacks happen when someone comes in and accumulates 51% or more of the company’s hash rate, giving them control of the generation of blocks. PoS mechanisms are not immune to these attacks, but it rarely happens due to the way the mechanism is set up.
- PoS consensus mechanisms can handle many more transactions per second, known as scalability. Instead of handling a few dozen transactions per seconds, PoS mechanisms allow for the handling of several thousand transactions per second, which is a huge difference.
- PoS consensus mechanisms, or blockchain networks, use less terawatt-hours of energy, which is of concern to environmentalists.
What Is a Staking Pool?
Sometimes, many network stakeholders form a pool to increase the chances of validating a new block and getting rewarded for it.
With this method, the more you invest, the bigger your share of the “reward” will be. If your particular network requires a lot to enter the agreement, a pool might be the best way to get in on the arrangement.
That being said, these pools often require a lot of money to be a part of them, so they are not for everyone. Some pools even offer benefits when it comes to establishing a minimum balance, withdrawal time, and other aspects of the transaction.
Pools tend to attract new participants as well, which results in better decentralization of the network. While all of this can sound complicated, staking is really not that difficult to understand.
There is more to it than what is mentioned in this article, but the good news is that there is plenty of information available when it comes to staking, so it is easy for you to learn more about it if this is something you think you might be interested in.
