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Staking put simply is a way to earn passive income from your investments in digital assets. You could compare it to your fund lying in your savings account earning you a decent interest income. However, there is much more to staking than just idle crypto making you more in the process.
To understand how staking works, let us find out what exactly is staking.
What is staking?
First things first, only some cryptocurrencies allow staking. Notable among them are Ethereum, Solana, Cardano, and Eterna’s native token $EHX to name a few. Staking refers to locking your crypto assets for a while in a certain blockchain to help support its operation.
As a token for staking your crypto, you earn some rewards in the form of more crypto.
It is with this idea that many crypto traders and investors stake their crypto holdings. But to understand how the staked crypto earns more crypto and what are the advantages and disadvantages of staking crypto, you will need to understand the concept behind staking and proof of work.
What is Proof of Work?
Blockchain is based on the idea of decentralization. This means there is no middleman, or central authority, overseeing the entire operation. Who then ensures that everything is working just as it should sans errors and corruption? This is where the “consensus mechanism” comes in.
Blockchains like Bitcoin use a consensus mechanism called Proof of Work. Through this, Bitcoin tries to solve the problem of validating transactions between parties to ensure no amount is spent twice. “Miners” globally try hard to solve a cryptographic puzzle first to earn the right to work on and add the latest block of verified transactions to the Bitcoin blockchain. They do this to receive some crypto in return. The very act of trying to solve the puzzle to earn the right to mine requires a huge amount of processing power. This is not an environmentally friendly way of going about this.
Not only that but also the fact that Bitcoin is a simple blockchain with a simple utility that can be easily scaled in case of a large number of requests arises.
But in the case of Ethereum, which is a complex blockchain with numerous utilities and applications, including DeFi, scaling could be an issue as each block could need more time to mine and a lot of blocks to be verified and validated at any given time. This is where Proof of Stake comes into play.
What is Proof of Stake?
Proof of stake allows blockchains like Ethereum to increase their power and efficiency while significantly reducing fees. It solves the first and biggest bottlenecks, i.e., miners don’t need to solve cryptographic puzzles to earn the right to mine. This also relieves a lot of pressure on energy resources.
Instead, validators earn the right to mine on the blockchain by staking some cryptocurrency that they offer as insurance or a token of proof that they will do their work diligently and in a trustworthy manner. This ensures the legitimacy of every new block that’s added to the blockchain.
The network chooses validators based on how much they have staked and how long they’ve held it. This ensures the most invested people are rewarded with the opportunity to validate and earn more coins.
In case a transaction is deemed invalid or wrongly validated, then a part of the validator’s stake is burned. This is known as a slashing event.
All this put into place ensures a seamlessly functioning blockchain that works on trust and stake.
This brings us to the idea of staking and earning rewards.
Typically, blockchains require validators to hold a certain amount of crypto to be eligible for validating transactions on the network. Ethereum, for example, needs its validators to hold at least 32 $ETH which translates to $42,312 at the time of writing this article. Not everyone might hold that kind of $ETH to reap the benefits of staking. Staking pools allow many individuals to come together and pool their coins to participate in staking and start earning rewards.
How do you start staking?
You will need to set up a cryptocurrency wallet that will allow you to participate in staking. You can delegate some of the coins you hold in this wallet to staking. You then browse through the various staking pools listed to find a validator with whom you would like to use your share of tokens to validate blocks on the network. Your tokens are then combined with the stake, giving you the chance to participate in staking rewards from generating blocks.
When you join an exchange and choose a staking program, it tells you exactly what you can hope to earn from your stake. For example, Eterna Hybrid Exchange offers 20% APY (Annual Percentage Yield) when you stake on the platform using its native token $EHX.
That’s not all, you also earn your share of 50% of Eterna’s net income.
Once you stake your crypto, you keep receiving your returns as per the schedule. The staking program will pay you in the staked cryptocurrency. You can hold this crypto you receive as an investment, put it up for staking, or trade it for fiat currency.
What are the advantages of staking?
Staking offers the following benefits:
No fuss: It’s easy to get started with staking. All you need to do is create a crypto wallet on an exchange.
Passive income: While your tokens might not be liquid enough anymore, they will continuously earn you returns without you doing anything (apart from staking your crypto).
Make a difference: By staking you show your trust and support in the network you’re staking in. You help make the blockchain better, stronger, and more efficient helping increase the value of your crypto in the process.
The only thing you need to be mindful of when staking is that you’re locking in your tokens for a long time which means you’ll not have access to them in case the price starts falling and you’d like to sell the token and limit your losses. You’ll also not be able to sell them in case you need some quick cash.
Staking is a good way to make your crypto earn for you. It’s an especially good option when you are looking for long-term investment and are not worried about market volatility and short-term price fluctuations. This way your crypto keeps earning you more crypto instead of sitting idle in your wallet.
Do your due diligence before putting your money into staking. Look into the exchange and platform. Read the terms of staking carefully and find out for how long your crypto is going to be locked up and how long it’s going to take to get the token when you want to withdraw your stake.
Crypto as a concept is still evolving and is subject to market volatility. Please ensure that you do your research before investing in any kind of staking program. It’s a good idea to start staking money you don’t bother losing and take it from there.
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