Coin/cryptocurrency staking is the process of actively participating in transaction validation on a proof-of-stake (PoS) blockchain.
Blockchain based cryptocurrencies has been an alternative way for people to make money. Cryptocurrencies remove the need for relying on the stock exchanges or traditional brokers. So many people around the world are making money through crypto trading, mining or staking.
What is proof of staking coins?
Proof of staking (PoS) is a relatively new consensus algorithm for some cryptocurrencies. 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 quantity of coins they have staked. The more coins a person stakes, the higher their power to validate transactions.
How does it work?
In a regular cryptocurrency network like Bitcoin, transactions are randomly processed by the mining node that is the first to solve a complex hash algorithm at the end of a time frame. Investors holding Bitcoins can’t say which network operator validates the transaction.
In Proof of Staking protocol, miners are selected 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.
The benefits of staking coins
Staking coins has these benefits:
- The consensus mechanism removes the need for buying 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 who own enough holdings in the coin can validate transactions on the network.
- The value of assets staked through PoS doesn’t 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 in Bitcoin.
- The threat of 51% attacks is declined in a coin/cryptocurrency staking system.
The major benefit of staking coins is that there is no need to purchase expensive hardware. The system offers a guaranteed profit 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
Coin/cryptocurrency staking in a bound wallet has one bug. The coins are locked up for some time and cannot be sold.
Although his may not be an issue 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.
Some of the popular cryptocurrencies for coin staking are DASH, Neo and okCash.