How does Staking work?
How does Staking work?

By CryptoInfluencer | CryptoUpdate | 2 Feb 2020


Nowadays it seems that everyone is talking about cryptocurrency staking. As it continues to grow in popularity, exchanges around the world seem to be lining up to offer their customers staking services - with a good number of buyers among their customers.

if you are one of the many people out there who have never grasped the concept of staking - or have trouble understanding what it is, here is a basic guide to explain how it works and some tips that will help you get started if you decide to start staking.

What is staking?

Staking refers to "blocking" the digital asset of a network in order to improve the effectiveness of a blockchain network. This blocking of funds is what gives the action its name, as the participants must first make a "stake".

In exchange for staking funds and helping to protect the network, participants are often allowed to receive a share of the block rewards.

Blockchain network operators typically use staking in two ways.

1- The first way is to use it as a consensus mechanism. Blockchain networks require a tool that allows their participants to agree on the final state of the ledger and to coordinate their actions in a decentralized way.

This consensus mechanism is often called proof-of-stake (PoS). Contrary to proof of work (PoW), which involves the use of computational power to solve complex mathematical equations, PoS requires participants to pay a minimum amount of funds to allow the addition of a new block to the ledger.

Participants in this type of initiative are called validators. In exchange for their efforts to certify the veracity of transactions, validators receive rewards in blocks, similar to those of PoW, when miners get, for example, bitcoins.

PoS took place for the first time on the Peercoin network.

Peercoin was created by Sunny King and Scott Nadal and started as a hybrid blockchain platform, leveraging both PoS and PoW. The network has phased out PoW and currently only uses PoS.

Staking as a consensus mechanism began to attract a significant amount of attention in the crypto sector when it was revealed that Ethereum was working on the transition from its PoW to PoS consent mechanism.

When Ethereum 2.0 is finally launched, the Ethereum network will completely depend on PoS.

2- The second way in which staking is exploited is in the masternodes.

Masternodes are specialized nodes that allow a blockchain network to introduce new features into its architecture.

The masternodes made their debut in the Dash ecosystem, where they were used to support private transactions.

Users who created 1,000 Dash tokens have earned the right to run nodes with more responsibility. As a profit, masternode operators were entitled to higher prizes.

Dash's masternodes have been so successful that several rival blockchain networks have started to emulate their success.

The importance of staking for crypto networks

The use of staking as a consensus mechanism has been praised by many in the cryptocurrency sector thanks to a number of factors.

First, proof-of-stake is energy efficient. It does not require computational power to solve mathematical equations. As a result, PoS networks consume only a small percentage of the energy consumed by a PoW blockchain platform that consumes energy instead. In today's increasingly eco-conscious world, this aspect is a significant advantage.

Second, PoS advocates believe that this mechanism is more secure than other consensus mechanisms, in particular PoW. A number of smaller blockchains that employ PoW have fallen victim to 51% attacks.

This is possible in PoW because consent is created through a collection of computational power. Therefore, if the bad actor in question is able to successfully distribute more hash power than the greater hash frequency, he can take control of the network. (However, in the case of Bitcoin, an hour of an attack on this network would cost more than USD 800,000, according to crypto51.app, and would essentially only allow for double spending, while it would not allow the attacker to steal everyone's coins.)

With PoS, however, it works differently. This is due to the prohibitive amounts of funds that an attacker would have to put as stake to successfully launch a 51% attack.

Furthermore, the attacker would penalize the value of his own shareholdings, effectively canceling the very advantage of conducting a 51% attack.

For masternodes, staking is advantageous as it allows blockchain networks to introduce new features without performing complex architectural revisions.

The previously mentioned Dash network, for example, has introduced masternodes to support private transactions. And another blockchain network, Syscoin, uses masternodes to support its decentralized market.

"the market will explode"

People who choose to participate in the staking economy - through a PoS network or through masternodes - usually do so for economic reasons. Contrary to popular belief, staking is far from passive. Unlike HODLing, stake allows you to generate a profit from funds that otherwise would likely remain inactive.

Additionally, staking supporters believe it is a safe way to earn revenue from cryptocurrency holdings.

The owner never loses control over the staking tokens, unlike a number of other profit-making activities. In addition, it is generally easy to withdraw staking funds if and when you need them.

Many staking analysis platforms are convinced that, the staking market will explode in the coming years, as each new blockchain relies without exception on Proof-of-Stake and layer-2.

Possible Disadvantages

Staking rewards are typically paid in the native token of the blockchain network in question. Therefore, individuals who wish to make a profit through the token must evaluate the ecosystem as a whole, rather than simply looking at the expected return on investment (ROI) of a staking coin.

In other words, if the ROI of a negotiable currency is very high but the currency has very low market capitalization and trading volumes, it would probably be best to avoid it - as it will be difficult to cash in on the tokens you have earned without seriously disrupting the market.

Also, if the cryptocurrency you are staking with cannot increase in value or at least maintain its value, you will likely lose money. This is because the "interest" earned in the form of new tokens may not compensate for the drop in market value.

If you can choose the right token, the bet can be an excellent way to earn investment income.
However, like any investment, you need to be careful and reflect before every choice.

 



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