What is Staking coins?
All blockchains have one thing in common: transactions need to get validated. Bitcoin for example does this in a process called mining which is known to use a lot of electricity (Proof-of-Work). But there are also other forms of validation often referred to as the consensus mechanism. Proof-of-Stake (PoS) is one such consensus mechanism that can come in different variations and hybrid models. For simplicity reasons, we will just refer to all of these as staking. Coin staking gives currency holders some decision power on the network. By staking coins, you gain the ability to vote and generate an income. This is quite similar to how someone would receive interest for holding money in a bank account or giving it to the bank to invest.
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What Are Some of the Benefits
- One of the major benefits for staking coins is that it removes the need for continuously purchasing expensive hardware and consuming energy.
- The system offers guaranteed returns and a predictable source of income unlike the proof-of-work system where coins are rewarded through a random process with low probability. Another one is that the value of your staked coins doesn't depreciate unlike with ASICs and other mining hardware, but can only be affected by fluctuations in the current market prices. This makes proof of stake coins more environmentally friendly and more energy efficient than mining based coins.
How does it work?
In contrast to just holding coins in your wallet or locking them in a smart contract (masternodes), some coins added randomness to the process of staking and voting so that bad players have a hard time manipulating outcomes. The process is similar to a lottery in which the number of crypto coins you hold is equivalent to holding a given number of lottery tickets. Staking systems can also allow delegation in which each individual delegates their voting rights and earned income to a trusted party. Those delegates then earn all the rewards for block validation and pay their loyal supporters some form of dividends in return for their vote.
Always Do Your Own Research
Choosing the right coin to stake, is both a numbers game and a gut feeling. If you choose to begin staking, definitely begin your research on minimum amounts, staking rewards, and particular staking protocols. Always remember to pick a project that resonates with you and one that you expect will be around far into the future. After all, by staking, you’re helping to make that project become a reality.
