Coin staking will become an attractive alternative to trading for many investors because it seems to be a safe haven. But how does staking work? What profits are possible and are there any risks?
What is coin staking?
Coin staking is basically a by-product of proof-of-stake (POS), a relatively new consensus algorithm in many blockchains. Consensus algorithms are necessary for blockchains because otherwise, it would hardly be possible in the decentralized structure to maintain a uniform database and prevent double expenditure. The POS was introduced in response to the problems of proof-of-work, the consensus algorithm of cryptocurrency like Bitcoin. Staking is particularly important in masternode coins.
The POS consumes less and is more environmentally friendly because it uses less energy. In contrast to the POW, you don't need expensive hardware to participate. Many blockchains, therefore, rely on the POS concept. The most popular cryptocurrencies for Staker include:
- Tezos (extremely popular for staking)
How does coin stacking work?
The proof-of-work creates a kind of race among the miners. They have to solve a complex mathematical problem with their computers. Whoever has the right solution first is entitled to validate the new block and the associated reward. In the proof-of-stake, on the other hand, the miner is selected at random from a pool of node operators. In order to qualify as a node operator, the miner must store a certain minimum number of coins in his wallet. The number of coins can vary greatly depending on the blockchain. In some cases, the coins must also be stored for a certain period of time before they are approved for staking (like in the case of Tezos it`s about 40 days). The node operator in the POS is also rewarded with a block reward for validating the node.
How often a node operator is selected depends on the amount of coins that he staked. This means, for example: If a node operator staked 2% of the coins in circulation, then he is also entitled to 2% of the new transaction blocks in the blockchain for validation. The profit opportunities are very variable. Websites like poslist.org clearly show how high the stake rewards for different blockchains are.
What are the advantages of staking?
Staking has several advantages that make it a popular instrument. The main advantages include:
No state-of-the-art hardware and little specialist knowledge are required. Anyone can participate with enough coins.
In contrast to ASIC and other mining hardware, the value of the assets at the POS does not decrease over time, if one does not take account of price fluctuations.
The risk of 51% attacks is reduced at the POS since it would be much more expensive and therefore less profitable for attackers.
Especially in a bear market, many investors swear by stacking coins.
Where can I start staking?
First of all, you can stake Tezoz with your Ledger Hardware Wallet. For more information about staking with Ledger please read my article "Tezos Staking with Ledger Live - Some say it`s the New Mining".
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