An Introduction to Cryptocurrency Staking
On the surface level, staking is a way of earning rewards for holding some cryptocurrencies. It involves locking up a portion of your cryptocurrency for a specific period as a way of contributing to a blockchain network. Stakers get rewarded typically in the form of additional coins or tokens.
Staking can be considered similar to traditional investment instruments, such as depositing money in a bank and agreeing not to withdraw it for a set period. This generates interest for the depositor. Staking involves delegating a certain number of tokens towards the administrative model of the blockchain. These tokens are out of circulation for a specified length of time.
How does staking work?
If a cryptocurrency allows staking, such as the MARS Coin - the holder can volunteer to stack his tokens. In exchange, the holder may earn rewards. The staked tokens generate rewards because they work in a consensus mechanism called Proof of Stake.
With the lack of a central governing authority in decentralised networks, all transactions are verified using a consensus mechanism. Blockchain networks employ a consensus mechanism to achieve a necessary agreement on various transactions by synchronising the majority of the nodes on the network. There are two types of consensus mechanisms used by blockchain networks: Proof of Work and Proof of Stake.
Proof of Work vs Proof of Stake
Via proof of work, the network throws an incredible amount of processing power at solving mathematical problems for validating transactions and ensuring the legitimacy of the same. Miners are involved in solving these cryptographic puzzles. The first to solve these equations earns the right to add the latest block to the blockchain and receive some crypto tokens for their effort.
Proof of work is a scalable solution for simpler blockchains such as Bitcoin, which track incoming and outgoing transactions like a ledger. But it may cause bottlenecks when applied to complex blockchains such as Ethereum.
On the other hand, Proof of Stake omits the idea of miners solving math problems through an energy-intensive process. Instead, users put their tokens to stake to be eligible to add a new block onto the blockchain in exchange for a reward. These staked tokens act as a guarantee of the legitimacy of the transactions they add to the blockchain.
Validators are chosen by the network, depending on the size of their stake and the length of time they have held it. If transactions approved by a validator are found to be invalid, a certain amount of their stake can be burnt by the network. The burning of such stakes is called a slashing event.
Benefits of Staking?
Stakers get voting rights. These give the investor a say in the development of the protocol for a cryptocurrency. Additionally, as staking is a cost-effective method of verification, validators get to contribute to the security and efficiency of the blockchain they have invested in.
With tokens such as MARS, investors can simply opt to stake their holding and watch it grow without stressing about mining. Staking requires lesser resources as opposed to mining which uses intensive mining equipment and power. Long term cryptocurrency holders reap the benefits of earning additional crypto tokens by putting them at stake.
Staking surely is great a beginner-friendly way for all investors to reap the benefits of the cryptocurrency boom.
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