One of the key components in cryptocurrency, staking is the equivalent of mining but a far less intensive resource. Staking involves having funds in a cryptocurrency wallet. The purpose of this is to support the operations of a blockchain network by locking cryptocurrencies to receive rewards. You can usually stake your coins directly from your crypto wallet, but many exchanges offer staking services to their users.
Staking is similar to mining but without wasting resources. Much like the blockchain ledger, you provide security and the effectiveness of the blockchain network in exchange for an incentive, but rather than using energy to create new blocks, the individual uses staked coins.
Staking works similarly to a security deposit. When the minimum balance is met, a cryptocurrency deposit is made into the network as a stake. The size of the stake is in proportion to the likelihood of the node making the transaction being chosen to produce the next block. If the node creates a block successfully, the individual (sometimes known as a validator) receives a reward, much like how a miner is rewarded.
Staking is divided into two general categories: PoS (Proof-of-Stake) and DPoS (Delegated Proof of Stake).
PoS is the next logical step to the Proof of Work (PoW) model, but with a few additional benefits. For those unfamiliar with how Bitcoin mining works, Proof of Work (PoW) is the device that allows transactions to gather into blocks. The blocks link together to create the blockchain, and to add to the next block to the blockchain, Bitcoin miners work to solve mathematical puzzles. Whoever solves it first gets to add to the blockchain. As PoW aims to maintain decentralization with the currency, it requires a lot of work due to the energy required from the miner to purely keep the blockchain operational, but this is where Proof of Stake comes in. The idea behind PoW is that participants can lock their stake (their coins) at particular intervals and the individual may have the opportunity to validate the next block. But this depends on the number of coins you have. The more coins you have locked up, the better your chances, so rather than the PoW approach where you have to solve challenges, the eligibility is determined by how many staking coins you are holding.
An alternative version of PoS, it was developed in 2014, where DPoS helps users commit their coin balances as votes. The voting power an individual has is proportional to the number of coins held, so the more coins an individual has, the more power they wield. The votes are used to elect a certain number of delegates who will manage the blockchain on behalf of the voters. This allows peace of mind and extra security. Usually, the rewards of the staking are distributed to the elected delegates, who will distribute part of their reward to their electors in relation to the contributions they made individually, ensuring fairness and equality based on the coins they have. Again, the more coins, the bigger the reward.
There are significant advantages to this model. It allows consensus to be reached with fewer validating nodes which has a positive impact on network performance. However, due to the decentralized nature of the network, it is relying on a small group of nodes to validate the entire network. These nodes take charge of the operations and overall governance of the blockchain, but this means we are placing our trust in an individual to govern the blockchain for us. But if an individual commits a fraudulent transaction, a penalty is imposed.
As a delegate is elected by stakeholders and assigned to become a validator or block producer, the DPoS model allows a user to better understand their influence in a specific currency through other network participants.
Another aspect of staking, cold staking allows a person to delegate their staking power to another wallet, but one that is not connected to the internet to keep coins safe and secure in an offline wallet. At the same time, an empty online wallet is connected to the offline wallet and earns rewards for it. This empty wallet can stay online 24/7 without running the risk of being hacked.
As keeping a wallet running all the time is not suitable for most people, either due to the cost of running a computer all day long or a bad internet connection, this is done via a VPS (virtual private server), which is rented. As running a wallet on a rented VPS increases the risk of coins being lost or hacked, cold staking can attach an empty wallet to a VPS to earn the rewards for them, all the while keeping their coins secure in an offline wallet, also known as a cold wallet.
There are benefits and drawbacks to this approach. For instance, if the stakeholder moves their coins out of cold storage, they won’t receive the rewards. But it is useful for stakeholders with a large sum of money who want to guarantee protection of their funds while supporting the network.
Using the different types of staking can yield different rewards, such as earning transaction fees by applying to become a DPoS, receiving a percentage of tokens as rewards for staking, and holding or reducing transaction fees for staking on exchanges.
As you can see, staking is a subject that opens up more avenues for anybody that wants to earn a passive income by holding coins, and with apps like Flits, it’s becoming even easier to stake and gain entry into the blockchain ecosystem.
Download the app today to discover how easy it is to get started with staking from your device and get into the world of staking so you can earn a passive income and dive deep into the world of cryptocurrency.