In this article, I will explain what staking is, how it works, and what advantages and disadvantages it has.
What Is Staking?
Staking refers to the act of someone pledging their crypto-assets to a crypto protocol in order to receive rewards in exchange.
Staking lets users help make the network more secure by locking up tokens. As a result, users receive rewards for securing the network in the form of native tokens.
The higher the amount of crypto-assets that a user pledges, the higher the rewards received. The rewards are distributed on-chain, which means that the entire process of getting the reward is fully automatic and that staking is a passive activity.
How Does Staking Work?
If a crypto permits staking, a user can “stake” some of their holdings and earn a percentage-rate reward over time. This is done through a “staking pool” which can be seen as something similar to an interest-bearing savings account.
The reason why a user’s crypto receives rewards while being staked is due to the blockchain putting it to work. Cryptocurrencies that permit staking rely on a consensus mechanism that is known as Proof of Stake which is a method of making sure that all transactions are verified and secured without having the need for a bank or payment processor to oversee that. Once a cryptocurrency is staked, it becomes part of that process and can no longer be used or traded until it is removed from that pool.
At the moment, some famous options are Cardano, Polkadot, Solana, from the top 3, and others would be Avalanche, Tron, EOS, Algorand, Tezos.
What Advantages Does Staking Have?
It is not uncommon for long-term crypto holders to see staking as a method of having their assets work for them by generating rewards, instead of just collecting dust in the crypto wallet.
Staking comes with one big benefit, which is that it plays a role in making a blockchain project more secure and more efficient. When an investor stakes some of their funds, the blockchain becomes more resistant to attacks, and its ability to process transactions is increased. Staking is an essential part of the Proof-of-Stake consensus mechanism, and you can find out more about it in our video on this topic.
In some cases, projects can give out “governance tokens” to staking participants, which has the role of offering holders a say in future changes or upgrades that are discussed for the protocol.
What Disadvantages Does Staking Have?
Staking often asks for a lockup or “vesting” period, in which the cryptos used in the process aren’t allowed to be moved for a certain amount of time. This is obviously a con, as it means those users aren’t allowed to trade their staked tokens during this period of time – even if the market turns bullish and the price starts to increase.
It is highly recommended for every person interested in staking to do their research on the exact staking requirements and rules for every project before they get involved in it.
Conclusions
Staking is a way of increasing the amount of crypto one person has without doing much, really. By adding their coins to a project, not only do users get rewards, but they also contribute to making that blockchain safer and more efficient to use based on a consensus mechanism called Proof of Stake.
But, following market trends is highly important, otherwise, a user may find their investment stuck in the project for a period of time while the market goes bullish and the prices go up, so prior knowledge of how markets work is needed.