Beginner’s Guide: Cryptocurrency Staking
What Is POS (Proof of Staking) And How Does It Work?
An individual is only able to mine or validate new transactions for coins equal to the number of coins they have staked. The more coins a person stakes, the higher their power to validate transactions.
Benefits of Staking
- The consensus mechanism removes the need for purchasing high-end computer hardware. When a mining node stakes bound coins from an e-wallet, it is guaranteed a fixed percentage of transactions on the network irrespective of its processing power.
- Investors with enough holdings in the coin can validate transactions on the network.
- The value of assets staked through PoS does not depreciate with time unlike ASIC and other mining hardware. The value of the stake can only be affected by fluctuations in the currency prices.
- Proof of stake is environmentally friendly and more energy efficient than proof of work mining used in Bitcoin.
- The threat of 51% attacks is reduced in a staking coins system.
- The major benefit of staking coins is that it removes the need for purchasing expensive hardware. The system offers a guaranteed return and predictable source of income for miners unlike proof of work system where coins are randomly rewarded to the most high-level computing systems.
The Risks of Staking Coins
- Staking coins in a bound wallet has one drawback. The coins are locked up for a period of time and cannot be sold.
- This may not be a problem while the value of the currency is rising, it can lead to losses when the price is falling. The amount earned through staking might not be enough to cover the price depreciation during a bearish run.