Cryptocurrency staking can be called the twin of proof of work mechanism whereby the miners have to solve puzzles and earn the right to validate the next block. After a new hash is created in the blockchain, it has to be solved and authenticated by the other nodes on the chain to add it to the block. The advent of blockchain has helped us realize that decentralization is indeed possible in the distribution of resources. This is while maintaining the highest form of security encryptions.
In this article, we are going to understand staking in a bit more detail and know how to do it.
What is Proof of Stake or Stake?
So, every blockchain network that we have seen to date has their network of nodes (or computers). All these nodes need to work in consensus amongst each other to ensure that the chain is always up and running. Where the goal of a PoS is the same as PoW (proof of work), the mechanism is a bit different. In simple terms staking means that you hold down to some coins on your node and earn the right to validate the next transaction or even create new blocks. Staking here means locking the coins on the node, or you can also compare it to keeping your money in a traditional bank system and earn interest out of it.
How is a consensus reached about which node will validate the transaction?
Well, this depends on the node’s wealth. In other words, how many words have been locked in by the node owner on the respective network decides the next validator? Higher the stake means there are more chances of getting selected to create a new block or validating others.
How does Crypto Staking work?
Let us assume that you have invested in Ethereum, and there are 100 ETH in your wallet. Following a more decentralized model of working and reducing the barriers to entry, more validators can gain access to the system.
The best part of PoS is that you don’t need specialized machinery to work as a validator. Any day to day laptop or computer can be used to stake coins and earn a reward (yes, there are rewards too). Moving on, out of the 100 ETH, assuming that you choose to stake 50 coins and keep them in your wallet for a predefined time. With this, you can open an account as a validator. There is also a minimum limit for staking that various networks follow. So, before you plan to start staking, always check out the minimum limit. For Ethereum 2.0, it is 32 ETH.
Is Delegated PoS a part of Staking?
Yes, in delegated staking, some stake owners can willingly transfer their rights to vote and income to another party. The receiving party can then earn rewards from staking only to share them with the supporters.
Pros and Cons of Staking
The lucrative returns on staking can convince anyone to try their hand at it. However, staking is as plain as day; there are some twists involved. Where the benefits accrued involve monetary rewards and a reputation to become a good validator, flip the coin, and you can also incur losses in staking. Losses because when you stake your coins for a fixed period of time, you cannot take them out.
And this inability to withdraw them at will forces you to face any kind of unexpected or sudden drop in the market value of the staked coin. In that scenario, if the price does not bounce back, you may incur a loss.
To stake or not to stake?
Well, seeing the trends and evolutions, it is extrapolated that the cryptocurrency market was valued at $850 Billion in 2018 and is growing at a CAGR of 11.9%, the future is bright. Thus, if you wish to become a validator, conduct some market research on which type of coin you want to invest in, read the market, and tread carefully.
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