Staking Cryptocurrencies

In this article, we are going to talk about staking cryptocurrencies, covering the following topics: What is staking, how does the stake process work, and what are the advantages and disadvantages of staking.

The Proof-of-Stake (PoS) mechanism underlies the staking of cryptocurrencies. PoS is a similarity algorithm that some cryptocurrencies use. Staking cryptocurrencies creates new blocks, which are then added to the blockchain. Investors who stake their coins contribute to the validation of these blocks. The more cryptocurrencies you stake, the more important your role in the network is and the more coins you receive as a reward for staking your coins.

Staking cryptocurrencies is very similar to receiving interest on your regular savings account. This is because when you strike cryptocurrencies, you buy a certain amount of cryptocurrency from a coin or token that can be staked. Then, all you have to do is keep this coin in one of your cryptocurrency wallets. 

How does the staking process work?

The Proof-of-Stake mechanism is a consensus algorithm for certain cryptocurrencies. The PoS mechanism creates new blocks that are added to the blockchain. These blocks are ‘staked’ by investors who already have a certain amount of the particular coin in their wallet, which helps validate transactions on the network.

As a staker you can only mine or validate the number of coins you have staked in your wallet. This therefore means that the more coins you have staked, the more power you have to validate transactions, the more rewards you will eventually receive.

Staking coins therefore provides a financial incentive, by helping to build and validate the blockchain infrastructure. Also, discontinuing coins helps to keep all nodes within the network on the right track. This is because there are also nodes that try to insert a fraudulent transaction into a block.

When this is the case, other nodes in the same network will refuse to accept that fraudulent block. As a result, the node attempting to commit fraud will no longer be able to validate blocks and thus will no longer receive rewards. In most PoS networks, all coins that this fraudulent node was based on will be lost.

Advantages and disadvantages of staking

The headlines above explained what stakingis and how the staking process works. As described earlier, striking is a way to receive rewards by contributing to the network. Listed below are some of the benefits of staking:

  • staking eliminates the need to have to invest in expensive mining equipment when you want to contribute to the (validate) blockchain network.
  • The Proof-of-Stake (PoS) mechanism, is more environmentally friendly and energy efficient than the Proof-of-Work (PoW) algorithm, used in, for example, the Bitcoin network.
  • Stake can provide you with a passive source of income in the form of coins.
  • No technical knowledge is required to stake.

One disadvantage of staking cryptocurrencies is that you have to hold the cryptocurrencies for a certain period of time to really reap the rewards.

Staking on an exchange

Click here for an explanation and tutorial, how staking works at Bitvavo.