What is staking and how to do it?
First, we will start by telling you that what is staking and then we will move on to the part of how to do it. Anyone who is involved in cryptocurrency has heard this word. Many of the cryptocurrency beginners do not know about it.
What is Staking?
In staking, you support the network and hold cryptocurrencies for verifying transactions. You can hold cryptocurrency in your digital wallet for supporting the security of the blockchain network.
In staking, you lock your currency and earn a reward through it. You will receive a reward for holding coins and supporting blockchain networks. This reward can be assumed as an interest. You can hold coins and generate passive income through staking. If the value of the coin you hold increases, then you can earn more money through staking.
Staking is not supported by all cryptocurrencies. We will tell you that how can you stake, and which cryptocurrencies provide the facility of staking.
It can be considered an alternative to mining because it is also used for verifying transactions. Staking can be done on a proof-of-stake blockchain. Anyone who has the minimum amount of a specific cryptocurrency can earn staking rewards by validating transactions.
What is Proof of Stake?
It is a consensus mechanism. It helps blockchains to operate energy-efficiently. It maintains the degree of decentralization.
Scott Nadal and Sunny King were the ones to discuss this term first in their Peercoin paper in 2012.
What is Delegated Proof of Stake?
Daniel Larimer designed an alternative version of the consensus mechanism in 2014. It was named delegated proof of stake.
In DPoS, coin balances are committed as votes by users. The number of coins held is proportional to voting power. Delegates are selected based on these votes. These delegates manage the blockchains and ensure security and consensus of the blockchain. The elected delegates get staking rewards. They distribute these rewards in people who elected them depending on their contributions.
How does staking work
Unlike proof of work, which relies on mining for the addition of new blocks into the blockchain, proof of stake produces and validates the new blocks through the staking process.
In staking, validators lock their coins and they are selected randomly at specific intervals by protocol to build a block. Those participants who stake larger amounts are most likely to be selected as the next block validators.
We do not have to rely on special hardware such as ASIC for producing blocks. In staking, direct investment is done in cryptocurrency. The validators who validate PoS blocks are selected based upon the number of coins that they are staking.
- When a node meets the minimum balance required for staking, then this amount can be deposited in the network as a stake.
- The larger the number of coins being staked, the higher probability to be selected as the next validator.
- The validator will receive a reward when a block is created successfully just like proof-of-work chains reward the miners.
- If a validator tries to attack the network or double sign, then they lose their stake part
You receive a reward when you stake a cryptocurrency. Mostly it is a fixed percentage per year. This percentage can change from time to time. You can receive rewards individually or by using a pool. We will be discussing the staking pool later in this article.
How rewards are calculated:
The method of calculating staking rewards is different for every blockchain network.
Many different factors help in the calculation of staking rewards.
- Number of coins: The staking reward depends on the number of coins that are being staked, by the validator
- Duration of staking: for how long the coins have been staked by the validator.
- Number of coins on the network: Another important factor is how many total coins have been staked on a blockchain network
- Inflation rate
A fixed percentage is used to determine staking awards. Validators distribute these rewards to compensate for inflation. Users are encouraged to spend their coins through inflation. This increases the usage of coins as cryptocurrencies.
The frequency of blocks that a cryptocurrency network produces also helps in determining the staking rewards.
A group of coin holders merges their resources in a staking pool, for increasing the chances to validate blocks and receive rewards. Staking power is combined and the rewards are shared proportionally to those who contributed to the pool.
A lot of expertise and time is required for setting up or maintaining a staking pool. They are most effective on networks that have a high barrier of entry.
Pools provide additional flexibility to individual stakeholders. The stake is locked for a specified period and the withdrawal time is set by the protocol.
It is considered ideal that new users should join the pool instead of staking alone.
In this process, staking is done on a wallet which is not connected to an internet connection. It is done mostly by using a hardware wallet. However, a software wallet can also be used.
Networks that provide the facility of cold staking hold the user funds offline and allow them to stake. If coins are moved out of the cold storage by the stakeholder, then they will stop receiving any reward.
It is best for stakeholders who want their funds to be protected at a maximum level.
Eligibility criteria for staking:
the criteria to be eligible for staking is
- Your identity must be verified
- A minimum balance of specific cryptocurrency must be possessed.
- You must hold the eligible cryptocurrency.
Hope now you are very much clear that what is staking and how to do it.