If you’re a crypto investor, staking is a term you’re likely to hear frequently. Staking is a mechanism used by various cryptocurrencies to verify transactions and lets users earn incentives for their holdings.
However, what is cryptocurrency staking? Staking cryptocurrencies is a technique that entails entrusting your crypto assets to the support and confirmation of a blockchain network. With that arise various crypto staking misconceptions.
It is compatible with cryptocurrencies that operate on a proof-of-stake model. This is a more energy-efficient version of the proof-of-work model than the original. Proof of work is accomplished through the use of mining equipment that employs computational power to solve mathematical problems. Having said that, there are certain crypto staking misconceptions that you must know.
Staking may be an excellent strategy to make passive income with your cryptocurrency, especially when certain cryptocurrencies provide high-interest rates for staking. Before you begin, it’s important to have a thorough understanding of how crypto staking works, and then we will throw light on a few crypto staking misconceptions. Let us begin!
How Crypto Staking Works?
Staking is how new transactions are added to the blockchain for cryptocurrencies that follow the proof-of-stake model.
To begin, players make a cryptocurrency protocol promise of their coins. The protocol selects validators from among those participants to confirm transaction blocks. The more coins pledged, the more likely it is that you will be selected as a validator.
Each time a new block is uploaded to the blockchain, new cryptocurrency coins are produced and awarded to the block’s validator as staking rewards. Typically, the prizes are the same sort of cryptocurrency as the ones staked by players.
To stake cryptocurrency, you must hold a coin that operates on the proof-of-stake model. Then you may select the stake amount. This is possible via many major cryptocurrency exchanges.
The unstacking procedure may take some time; certain cryptocurrencies require you to stake coins for a specified time.
Staking is not available for all cryptocurrency kinds. It is only accessible for cryptocurrencies that utilize the proof-of-stake model. Numerous cryptos employ the proof-of-work model to add blocks to their blockchains. The issue with proof of work is that it needs a significant amount of computational power. This has resulted in substantial energy consumption by cryptocurrencies based on proof of work.
Proof of stake, on the other hand, consumes a fraction of the energy. This also makes it a more scalable alternative, capable of processing a higher volume of transactions.
8th April 2022 Update: Chorus One, which provides a PoS system, and secures more than 28 networks, has introduced a new $25 to $30 million investment fund on its balance sheet for PoS networks, contracts, and related products for the next three years.
What Does “Proof of Stake” Mean?
Proof of stake is a consensus technique used in cryptocurrency – a means for a blockchain to validate transactions. The nodes in a blockchain must agree on the network’s current state and which transactions are genuine.
Cryptocurrencies employ a variety of different consensus processes. Proof of stake is a popular method of payment due to its effectiveness and the fact that participants can receive incentives on the cryptocurrency they stake.
14th April 2022 Update: Ethereum blockchain plans to switch soon from a consistent proof of work to PoS, bringing more attention to the process by which asset owners stake their coins to gain the right to validate new transaction blocks and add them to the blockchain.
Common Crypto Staking Misconceptions
You Must Have a Sizable Bankroll to Stake
While it is well-known that several cryptocurrency projects that utilize the POS protocol require a significant investment to become a staking validator, the idea that one cannot stake without a large quantity of money is incorrect. This is often considered among the crypto staking misconceptions.
Investors that lack the required capital to become full validators might stake by delegating to a staking pool. Indeed, delegating is suggested for the ordinary cryptocurrency investor, as validating often demands high-end hardware and an industrial-grade internet connection.
A staking pool enables investors to pool their resources to increase their chances of winning rewards. Staking power, on the other hand, is proportionate to the percentage of total assets staked.
Many network users lack the necessary assets to validate independently; as a result, they choose to donate their resources to a staking pool by delegating what they do have. Stakers receive a share of the earnings generated by block rewards. Typically, these pools are managed by administrators who oversee their operations and activities. Operators often charge a commission that is disclosed in advance.
Additionally, some staking assets incentivize longer and more continuous staking periods: the longer your resources remain in the pool, the better your rewards. Due to the existence of staking pools, there is no compulsion to invest the minimum staking required to be a validator. Rather than that, the community pool balances the resources and ensures equitable profit distribution.
Staking Impacts Negatively on the Environment
This is again one of the crypto staking misconceptions among the stakers. PoS is more ecologically friendly than alternative consensus processes, such as the PoW, and has a higher transaction volume and capacity. Since its beginning, the PoW model has been a source of contention because of its high energy consumption and significant negative environmental effect.
PoW, which powers key projects such as Bitcoin, Litecoin, and Dogecoin, demands network users to complete particular tasks including solving arbitrary mathematical problems to verify the network and preserve the blockchain’s integrity. Due to the heightened rivalry implied by this model, miners made significant expenditures on powerful computers to mine more efficiently. As a result, energy usage and costs increased.
It is rather typical for individuals to criticize cryptocurrency projects’ consensus methods together. However, staking has a negligible environmental impact.
Rewards for Staking are Always Secure and Consistent
Despite the tremendous benefits of blockchain technology, like enhanced trust, security, and transparency, profit creation consistency cannot be completely assured. The rate of return cannot be guaranteed due to the random selection of validators, which results in occasional ups and downs in returns. Additionally, validators charge a variable fee. Depending on the validator you choose, this may result in some pools receiving fewer payouts than others.
Additionally, you may lose part of your staked assets due to a process called slashing. While this is not a feature of every POS cryptocurrency, it does exist for Polkadot, Cosmos, and Solana. When the validator behaves incorrectly, slashing happens. This might be due to submitting a transaction twice, being offline for an extended period, or any number of other causes.
If you have crypto that you can stake and have no immediate plans to exchange it, you should stake it. It requires no work on your behalf, and you’ll earn more cryptocurrency.
Given the potential profits, it’s worthwhile to research cryptos that support staking. Several cryptocurrency exchanges provide this service but are sure to analyze each one to see whether it is a sound investment. It makes sense to purchase a cryptocurrency for staking only if you feel it is also a solid long-term investment.
Both cryptocurrencies and cryptocurrency investors have benefited from the proof-of-stake model. Proof of stake enables cryptocurrencies to handle a huge volume of transactions at a low cost. Additionally, cryptocurrency investors might earn passive income from their holdings. Now that you have a better understanding of staking and crypto staking misconceptions, you can begin researching cryptos that support staking.