If you are into the crypto space you might have wondered what people mean when they talk about staking. Staking is a way to put your crypto to work and earn rewards on it.
There are two different models crypto networks use to process payments. One is the proof-of-work (i.e. Bitcoin uses it). However, the second model is called proof-of-stake. Proof-of-stake is a more energy-efficient alternative to the original proof-of-work model. While proof-of-work requires mining devices that use computing power to solve mathematical equations, proof-of-stake needs you to commit your crypto assets to support a blockchain and confirm its transactions.
How staking in crypto works
Participants pledge their coins to the cryptocurrency protocol. From those participants, the protocol chooses validators which then confirm blocks of transactions. The more coins you commit, the more likely you are to be chosen as validator.
Every time a block is added to the blockchain, new cryptocurrency coins are minted and then distributed as staking rewards. Most of the time the rewards are paid out in the same type of cryptocurrency that participants are staking.
Your coins are still in your possession when you stake them. You are just putting them to work and you are free to unstake them later if you want to have them back in your wallet. Be careful, the unstaking might not be immediate but rather have some sort of unlock period.
Benefits of staking your crypto assets
- easy way to earn high interest on your holdings
- there is no need for any type of equipment
- with your commitment you are helping the blockchain to maintain secrity and efficiency
- it is more environmentally friendly than crypto mining.
Be aware that while you are staking the price of your cryptocurrency can go down significantly. Also, while your coins are staked, you cannot trade them. They have to be unstaked first, which can take some time. Always think about, if the promised interest a crypto protocol promises can be sustainable.