Beginner’s Guide: Cryptocurrency Staking

Beginner’s Guide / 16.12.2018
Blockchain based cryptocurrencies provide an alternative way for people to make money. Digital currencies remove the need for relying on the stock exchange or traditional brokers. Millions of people around the world are making money through crypto trading, mining operations or staking coins.

What Is POS (Proof of Staking) And How Does It Work?

Proof of staking (PoS) is a relatively new consensus algorithm for some digital currencies. It creates new blocks that are added to the blockchain. These blocks are staked by a person who is already holding some coins and helps in validating a new transaction on the platform.

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.

In a regular crypto network like Bitcoin, transactions are randomly processed by the mining node that is the first to solve a complex algorithm at the end of a time-frame. Investors holding Bitcoins have no say in which network operator validates the transaction.
In Proof of Staking protocol, miners are chosen randomly from a pool by holders of the digital coin. A miner can be added to the pool by staking a certain amount of coins in a bound wallet. The chosen node stakes the coins in the bound wallet and creates a new block that is proportional to the percentage of coins staked. For example, if the number of coins staked is 5% of the total coins on the network, the node can mine 5% of transactions for new blocks.

Benefits of Staking

Staking coins offers a number of benefits to mining operators.
  • 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.

Conclusion

As you can see, mining is not the only way to earn earn a cryptocurrency reward. Holding, staking and running masternodes it became pretty popular in 2018; it’s possible now to hold various cryptocurrencies and earn a relatively regular return by doing so. Check out these popular coins to stake.
Featured image courtesy of Shutterstock.
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Born in Bucharest, Marius is the founder of Crypto Adventure. Since his first contact with Bitcoin and cryptocurrencies, he never stopped believing that they are one of the most important innovations of our time, which will forever change the way business is done.