Cryptocurrency, staking, Bitcoin – The new trendy words that might have reached your ears when the TV was playing in the background or when you stood in lines at the coffee shop.The words sound fancy and technical.When you reach your office, everybody knows what it is about, where to invest, and discussions start buzzing around. So you decide to research it, and now you have landed on our blog.If you know nothing about the digitalization of money or staking, here is all that you need to know about staking in layman’s words.
First and foremost,
What is Staking?
According to Coinbase, Staking is the process of actively participating in transaction validation on a proof-of-stake (PoS) – Blockchain.
It is basically keeping some money in a bank account and taking it out after a period of time while also earning the interest.But instead of physical currency or notes, you have Crypto assets; coins.
Staking is the securing and encryption of transactions for those who want to stay crypto.
When Bitcoin was launched in 2009, it had proof-of-work functionality where different people or groups of people competed to solve a difficult equation through supercomputers. The one who solved it fastest won and got to write the next ledger of balances or block.
This was known as mining, and the people working in it, miners. But it had its set of disadvantages.
- In a 2019 BBC report, it was stated Bitcoin used 7 gig watts of electricity, which was roughly the same amount of electricity consumed in Switzerland over a year.
- Letting everyone compete and selecting one as the winner meant tiring everyone out and wasting their energies.
- Mining included only a large group of miners.
- It excludes individuals who want to participate but do not have high functioning, expensive computers.
- According to Bitcoin Wikipedia, miners perform work on the creation of blocks. The calculations that they do are completely useless in themselves.
Although Proof of Work has been around since 2009, when Bitcoin was launched, an alternative was necessary.
Proof of Stake
Proof of stake, a new tool that has been introduced in place of PoW wherein not everyone but a single individual, based on some factors, was selected as not a miner but a validator.
People deposit funds, or stakes which are actual coins to nodes or computers. Staking coins include Tezos, Cosmos, and Cardano.
These nodes compete for an opportunity to forge the next block. This is less risky and more energy-efficient than Proof of Work.
But not everyone is a validator. There are some rules and factors according to which the validator is selected.
Factors for a Validator
- The validator has to keep some coins as collateral to be able to be selected.
- The selected candidate is checked for the amount they have kept as a stake.
- If the validator has been in use for a long time, the period of the stakes is checked. But they are also selected by a random number generator.
- It can be an individual or a staking pool, a group of people who forge the next block.
- If the validator solves it correctly, he gets a staking reward that varies from company to company on his coins.
- If he keeps solving it correctly, he keeps earning rewards. In case a node stops being a validator, his stake, along with all his transaction fees, are released after some time.
- If he is found doing any fraudulent transactions, he is penalized, and he loses his coins.
The Staking Rewards are different for blockchains.
Tezos rewards 4.6% per year, Cardano rewards 4-5%, and Euthereum, which is the 2nd largest cryptocurrency in the world after Bitcoin, rewards 15%.
Some blockchains like Vechain and Algorand distribute rewards with no locking period and for only holding coins.
Thus it is a good way to earn staking rewards and is easier than proof of work, but it is still a fairly new tool that has a few downsides and risks.
Risks of PoS
- The locking period is fixed. If the coins have been locked for a year and are in a locked state, they cannot be moved, used or sent to someone else.
- The duration of the rewards can also take days and weeks, and once the node stops being a validator, the coins are not released immediately.
- It requires technical knowledge and coding.
- It invalidates DIY miners.
Staking is in a stage where it is continuously analyzed and observed.
As of now, it is only available in 6 countries such as the US, UK, France, Belgium, Slovakia and Spain.
Since it is new to the market, any decision regarding staking should be made with full information about staking and with the help and guidance of a professional advisor.