Cryptocurrency Staking: What You Need to Know

By Justino | An Angle of Truth | 16 Apr 2021


As the crypto world continues to evolve from a proof-of-work mechanism to the emerging proof-of-stake model, we are here to help you (our subscribers) understand what this new system is all about, Cryptocurrency staking. 

Proof-of-Work

 

First, let us give a background to this subject by flashing your minds through the more popular Proof-of-Work (PoW) model- this is the usual way that enables crypto on-chain actions to be assembled into blocks. A linked collection of these blocks is blockchain. 

To find out who is next in line to add a new block to a blockchain, miners have to compete with one another to give solutions to complex math puzzles. The point of all these technical jargons is that the PoW is essentially used to enable consensus in a distributed system that is blockchain. 

It is important you understand the concept of consensus before you continue with this piece, as it is one of the underpinning attributes of money. It ensures that a unit of money- in this case cryptocurrency nullifies double spending. 

Now the problem with PoW is that it involves a junk load of excess and arbitrary computation. To circumvent the burden of excess computation, high computational cost, and the extremely cumbersome burden of costly mining hardware, the creative humans of this world resorted to the Proof-of-Stake (PoS) mechanism to enable consensus on a blockchain. 

Proof-of-Stake

 

The PoS mechanism enables participants to stash their tokens (stake) from time to time on a blockchain, and the underpinning protocol randomly gives one participant the exclusive right to validate the next block on the chain. The more tokens stashed on the chain, the higher the chance for the next validator on the chain.  

What is Cryptocurrency Staking?

 

The perk that comes with cryptocurrency staking is that it is less cost intensive when compared to mining cryptocurrencies via the PoW mechanism. As you can already imagine from the background above, it is all about locking funds in a cryptocurrency wallet to facilitate the running and security of a blockchain.

What participants or validators do is that they lock their tokens to earn returns on their cryptocurrency investment on the blockchain. Participants get to stake via their trust wallet. Some crypto trade platforms also offer staking products to their users.

In contrast with PoW, on PoS one sees that solving complex math puzzles or hash problems is not what determines who gets to create the next block on the blockchain, but how many tokens participants lock in their wallets. The crypto staking mechanism also offers easier scalability for blockchain networks.

Who Invented PoS?

 

It is not unascertainable whom we should attribute the creation of PoS to, but we easily link the earliest use of the innovation to Scott Nadal et Sunny King via their Peercoin 2012 writ. In this paper, they qualified PoS as a: “peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin.

How does Staking Work?

 

As explained above, Proof-of-Stake blockchains produce and validate new blocks via cryptocurrency staking. What participants or validators do is that they lock their tokens to earn returns on their cryptocurrency investment on the blockchain.

The blockchain protocol randomly selects the next validator that will establish the next block at calculated periods. You can already imagine the odds are more likely to be in favour of participants who lock larger volumes of tokens or cryptocurrency.

With this method, capital-intensive hardware like ASIC, eliminates the enormous cost of mining under the PoW model. All participants have to do is stake or invest in the protocol’s token or crypto. Having one's skin in the game-staking one's hard-earned money on a protocol incites validators to ensure that the Blockchain is secure. No investor who has his skin in the game wants his hard-earned monies to go down the drain.

Crypto Pools

 

Validators who desire to earn more rewards may leverage their collective staking power by creating a staking pool with their pooled or merged crypto holdings. The rationale behind this is to take advantage of the perks that come with holding large volumes of tokens on a chain. It easily gives them the upper edge when a randomly chosen participant validates the next block. The participants of the pool share the returns of the tokens staked among them proportionally or according to the participant’s agreement.

Participants of blockchains or protocols that leverage PoS may also cold stake. This is stashing monies on protocols that have offline wallets, e.g., a hardware wallet, or a software digital wallet deemed air-gapped, and does not use the internet. Protocols that facilitate cold staking enable users stash their money while still taking charge of their funds offline and in a safeguarded manner.

Mind you, if perhaps you decide to dabble in cold staking, take note that once you withdraw your tokens from the cold storage, it will not entitle you to receive returns from it.

To end:

Kindly note that this piece is only for informational purposes only and not construed as investment advice. Should you desire to stake your funds, please conduct your due diligence investigation.


The Author is a transactional legal practitioner in the Tech and IP space. She is glad to answer your questions and know your experience via the comment section below.

Originally published on CryptoCurrency Academy.

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Justino
Justino

Self-Published Author. Editor.


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