Staking has quickly become popular in the Cryptocurrency world, as investors can earn passive income through this process. What exactly is staking though? In simple terms, Cryptocurrency staking is the process of locking your coins in an account with the promise of earning rewards. Although this process may seem simple, it is more complex than you think. In this article, we will discuss how staking works and highlight Proof of Stake. Keep reading along!
What Exactly is Crypto Staking?
Staking is more or less similar to Cryptocurrency mining, however, Crypto-staking is a less intense version of earning Cryptocurrency. As it is stated above, Crypto-staking is the act of placing your Cryptocurrencies in a locked account with the promise of receiving rewards.
Typically, you can stake your Crypto directly from your Crypto-wallet. However in some cases, you will have to use a Cryptocurrency exchange platform to stake your coins. Several platforms offer staking contracts and you can earn a large amount through this process.
How Does Crypto Staking Work?
To better understand Crypto-staking, you must first learn about Proof of Stake (PoS). PoS is a consensus protocol that allows users to be efficient in a decentralized manner. The mechanism allows blocks to be added to the Bitcoin Blockchain.
The main idea in PoS is to lock the coins, and a random protocol assigns the right individual to validate the transactions in the Blockchain. Typically, the probability of being chosen increases with the number of coins that you have staked.
Staking and PoS open up the Blockchain to anyone willing to participate in governance and consensus of the system.
What is DPoS (Delegated Proof of Stake)?
Delegated Proof of Stake is a consensus algorithm through which users can vote for “delegates.” These users must hold the Blockchain’s coin to vote.
The delegates are appointed to make critical decisions for the network, which include setting protocols for deciding which transactions hold validity.
The process is based on the concept of Proof of Stake. Here, a person holding a token can participate in a mintage process. This allows them to select two nodes that validate the block.
The mechanisms of the two consensus systems are extremely similar, however, there is one difference.
In Proof of Stake, every coin holder must contribute to the decision-making process by staking. On the other hand, only the elected delegates can participate in the Delegated Proof of Stake.
It is important to understand the basics of Blockchain consensus next.
What is the Blockchain Consensus Protocol?
Blockchain networks are not centralized, therefore, each device in a network verifies a transaction separately. The network must ensure that all nodes are in harmony because of this and must agree on which transactions are valid or not. The set of rules that make up an agreement is called “Blockchain consensus protocol.”
The Difference Between Proof of Stake (PoS) and Delegated Proof of Stake (DPoS)
Proof of Stake
Here, a user must put several Cryptocurrency units at stake to verify transactions. They will not be a validator otherwise. The creator of a new block is picked randomly. However, the user’s wealth and coins at stake are taken into consideration.
In this system, blocks are forged rather than mined, which is why forgers receive transaction fees instead.
Forgers must place their coins at stake to create blocks. If a fraudulent transaction is validated, they lose their holdings and participation rights. This is why this process is safer than most.
Delegated Proof of Stake
This process aims to speed up transactions and block creations.
In this system, users select a group of witnesses along with a governing body. The smaller number ensures speed and scalability. The top-tier witnesses are compensated for creating blocks and validating transactions.
The elected delegates govern the Blockchain, suggesting changes when necessary. However, this does not mean that the users do not have a say.
The protocol is put into effect only when the users approve it.
Overall, the delegated proof of stake is more efficient as a consensus mechanism.
The Truth About Staking Cryptocurrency
While staking Crypto will not make you an overnight millionaire, if done properly, it can be a great way to earn a passive income with little to no effort. However, it does have its challenges.
One of the significant drawbacks of staking is that the coin could undergo a fluctuating curve, which will jeopardize your investment.
Therefore, it is always advisable to stake coins that you can afford to lose.
Before you start staking, it is important to research your chosen asset thoroughly, just as you would any other investment.