For many investors Staking is becoming an attractive alternative to trading, especially during a market trend. But how does staking work? What profits are possible and are there risks involved?
What is Staking?
Cryptocurrency staking is basically a byproduct of proof-of-stake (POS or 'staking'), a relatively new consensus algorithm in many blockchains. Consensus algorithms are necessary in blockchains to maintain a unified database and prevent double spending in the decentralized structure. POS was introduced as an alternative to proof-of-work (better known as 'mining'), the consensus algorithm of cryptocurrency such as Bitcoin.
The POS is significantly more environmentally friendly because it uses less energy. Also, unlike POW, it does not require expensive hardware to participate. Therefore, more and more networks have been using POS.
Among the most popular cryptocurrencies for stakers are:
An entire industry has developed around staking. Our company P2P.org started back in 2018 and are now one of the most reputable at providing staking services.
How does staking work?
Proof-of-work creates a kind of race among miners. They have to solve a complex mathematical problem with their computers. Whoever has the correct solution first is entitled to the validation of the new block and the associated reward. On the other hand with proof-of-stake, blocks to be validated are designated to validators (amongst a pool of node operators) based on the network's pre-determined selection method. How often a node operator is selected mainly depends on the amount of coins they are staking. For example: If a node operator stakes 2% of the coins in circulation, then they are usually entitled to roughly 2% of the new transaction blocks in the blockchain for validation.
The node operator in the POS is recompensed with a reward for validating the block.
To qualify and sustain as a successful node, one is required to maintain a server running continuously and must deposit a certain minimum number of coins in their wallet. In some cases, the coins must also be stored for a certain amount of time before they are eligible for staking.
Proof-of-stake and coin staking: advantages and disadvantages.
Staking enjoys several advantages that make it a popular tool. Among the most important advantages are:
No state-of-the-art hardware required.
Unlike ASIC and other mining hardware, POS does not decrease the value of assets over time, except for price fluctuations.
The risk of 51% attacks is reduced with POS, as it would be much more costly and thus less profitable for attackers.
Especially during a bear market, many investors swear by staking coins.
Nevertheless, there are also some disadvantages and risks with this model:
The Coins may be blocked for a time period set by it's network's protocol. Thus, they are not available and cannot be sold. For Ethereum and Terra we offer "liquid staking" with our new project lido.fi
If node operators do not behave by experiencing down time or by double signing for example, they will be slashed or punished as pre-determined by the network's protocol
Unlike trading coins, staking is more of a long-term project. By participating in staking you are supporting the network, with the additional benefit of compounding your stake!
If you do not hold enough to create your own node, or do not have the infrastructure and experience to run it successfully, you can still participate in staking. This is where P2P Validator comes in - for more information please read our "What is P2P Validator?" article!
For more information on staking with P2P Validator, visit https://p2p.org/.
For additional introduction to staking support, visit the getting started support center.
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