Beginner’s Guide to Staking and Staking Pools
There are several ways to earn money with cryptocurrencies. Yet, cryptocurrency trading has always been in the spotlight. But unfortunately, not everyone in the industry will be a trader.
Initially, when the first cryptocurrency –Bitcoin– was introduced, it was built on the blockchain technology that uses the Proof-of-Work (PoW) consensus mechanism. This means the process involves using heavy processing power to solve complicated mathematical problems to validate transactions, ultimately securing and maintaining the blockchain and earning cryptocurrency as a reward.
On the other hand, the PoW mechanism is synonymous with cryptocurrency mining because the process requires maintaining the blockchain by validating and confirming transactions in exchange for rewards and mining new blocks. While PoW allows cryptocurrencies to use its protocol to process transactions peer-to-peer in a safe and decentralized manner, mining cryptocurrency has significant limits due to the high electricity consumption. Therefore, it has become incredibly expensive and almost impossible for a single person to invest in mining processing power. However, there is a potentially more sustainable approach, and that solution is Staking.
What is Staking?
Staking is a mechanism that entails storing funds in a cryptocurrency wallet to help secure and operate a blockchain network. Staking is the process of locking crypto assets to obtain rewards. Staking consumes less energy than mining because it does not need high computational tools to earn cryptocurrency. As a result, to stake cryptocurrencies on cryptocurrency exchanges, users need to deposit funds in specified cryptocurrencies that accept staking to support the blockchain network’s security and operations. Put simply, Staking is the act of storing cryptocurrency in exchange for income.
However, not all cryptocurrencies can be used for staking. Hence, a brief explanation of the Proof-of-Stake (PoS) mechanism is required to further understand what staking is.
How Does Staking Work?
Proof-of-Stake (PoS) was developed as an alternative to Proof-of-Work (PoW) and was intended to address some of the issues inherent in PoW. The principle behind PoS is that network participants can lock their crypto assets into a staking protocol that grants the right to them to validate the next block of transactions at specific intervals, thereby rewarding them for doing so.
Staking cryptocurrency entails obtaining and reserving a fixed number of tokens needed to confirm transactions recorded on the blockchain. Those with a “stake” in the network have first rights to adding the next block and are compensated appropriately. The number of coins locked determines the possibility of selection. The more coins you stake, the larger the payout.
Unlike PoW, staking involves direct investment in the cryptocurrency itself. Instead of computing effort to compete for the next block, proof-of-stake validators are chosen depending on the number of tokens staked. Choosing which participants will build blocks is no longer predicated on high computation as it was with proof-of-work.
In essence, anyone can perform various network activities in exchange for staking incentives. This involves contributing funds to the Staking Pool.
What is a Staking Pool?
A staking pool is a group of cryptocurrency holders who pool their resources to maximize their chances of validating blocks and getting rewards. This means multiple users combine their processing power to boost their aggregate staking power, which increases their chances of receiving rewards. As a result, more blocks may be checked and approved with additional computational power, increasing the total rewards a staking pool can earn.
The staking pool model is conceptually similar to the classic mining pool in that it involves the pooling of hash power in a Proof-of-Work blockchain. However, the staking pool model is only available on blockchains that use the Proof-of-Stake mechanism. In contrast, staking cryptocurrency is equivalent to depositing money in a bank as it requires locking up assets in exchange for a reward.
Staking pools can be public or private, with an administrator running the system. Assets are still staked in pools, and a lock-up period is frequently involved. Therefore, the more and longer your stake in the protocol, the greater your chances of getting rewarded. As a result, most staking pools encourage more frequent and extended staking periods. This means the longer you leave your assets in the pool, the more the percentage increase on your rewards. However, the rewards are often estimated and stated in annual percentage yield (APY).
How to Stake Crypto?
Many cryptocurrency exchanges provide incentives for staking on at least certain coins. As a result, direct staking through a cryptocurrency exchange is the simplest option to get started with crypto staking. Choose a trustworthy and reliable exchange for this, and do your own research on the procedures before you begin. Generally, there are multiple advantages to staking directly through an exchange as their reward is guaranteed compared to private pools that give ridiculous high APYs. Aside from the rating of the stake pool, it is essential to select staking pools that offer stakeholders regular updates on the staking pool’s performance and are transparent in their operation. Here’s how to stake your crypto;
Get Token on the PoS Blockchain
To begin staking cryptocurrency, you must first determine which coin you want to stake and then purchase. However, staking is not available in all cryptocurrencies, as it can be done with cryptocurrency on the PoS blockchain. Therefore, you’ll need a cryptocurrency that uses proof of stake to validate transactions. Some examples on the PoS blockchain are; Ethereum, Solana, Polkadot, Cardona, Cosmos, Tezos, and many more.
Transfer Your Token to a Staking Exchange and Join a Pool.
Once you purchase your cryptocurrency, it will be available in your wallet or on the exchange from which you bought it. However, some exchanges have their staking programs with specific cryptocurrencies. This means you can stake crypto on the exchange. Similarly, you can move your crypto to platforms that allow staking and with considerable APY.
However, Choosing which staking pool to join is determined by several factors, including commission rates, typically between 5% and 6%, and how they contribute to the ecosystem.
Staking is a consensus mechanism derived from the proof-of-stake model and an alternative to the energy-consuming proof-of-work approach. A staking pool is another approach to secure tokens on a specific blockchain. Thereby allowing users to pool their resources with others and divide the rewards. Moreover, if you’re new to crypto investing or want to start staking but don’t have an extensive portfolio, using a staking pool is a reliable option to earn passive income.
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