For you to understand what staking is, you need to at least know the basic of what Blockchain is, and how a transaction on a blockchain is validated. This is because, all types of blockchain have one thing in common which is the need for every transaction to be validated.
Bitcoin, for instance, validates by a process called mining, also known as Crypto Mining and is costly and time-consuming. Other than that, there are other forms of validation and one of them is Proof-of-Stake (PoS).
The method of PoS is known to be relatively new. The process creates new blocks which are then added to the blockchain. These blocks are staked by a person to help validating a new transaction on the platform and receive rewards. The higher the stakes, the higher the power for validation and thus, higher rewards.
In other words, staking means holding a certain amount of coins on a unique wallet that runs on a PoS platform. The coins you deposit are locked for a certain period.
The Purpose of Staking
The main purpose of staking is to provide security to the network of transactions. The more wallets are staked, the more secure the network platform is. Besides, the consensus mechanism will lead to cost-saving as there is no need to purchase expensive computer hardware for mining.
Difference Between Mining and Staking
Generally, staking is similar to mining, however, no equipment is needed. For staking, a unique wallet for users to hold their coins for certain amount of time is required. Besides, staking is better for environment as it does not consume a lot of energy and there is no need to purchase a high-end hardware to mine cryptocurrencies.
Benefits of Staking
Besides removing the needs to acquire mining hardware and save energy and electricity, staking lets investors with enough holdings in the coin to validate transactions on the network. Also, the threat of 51% attacks is reduced in a staking coins system. In addition to that, the consensus mechanism offers guaranteed returns and a predictable source of income unlike Proof-of-Work (PoW) system where coins are rewarded through a random process with low probability.
Typically, when there is an advantage, there will also be a drawback, and the downside of coin staking is due to cryptocurrency’s price volatility. Since the coins will be locked in the wallet for a period of time, the falling in price will lead to loss for investors and the amount rewards earned through staking might not be enough to cover the price depreciation during a bearish run.
Hence, do your own research before investing and be sure to know the consensus mechanism used on a platform as well as on your chosen cryptocurrency.
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Nurul is an English Language graduate who is highly passionate on writing, she literally breathes on it. An avid reader and a critical thinker, she covers on blockchain news during day and weeps at sad novels at night.