What is staking?
Usually, if you don’t have a large capital to buy computing rigs designed for crypto mining, you have almost no chance of being profitable in mining cryptocurrency.
However, through staking, earning digital coins through minting is more equitable and rewarding.
What is Staking?
Staking is said to be the cheaper and less resource-intensive alternative to cryptocurrency mining. It can be as profitable as mining crypto with the advantage of having lower risk and less need for powerful machines.
It basically involves staking coins into the network to receive rewards. The more coins staked, the higher the number of blocks you can forge.
Usually, blockchains rely on mining and the concept of Proof of Work (PoW) to add new blocks to the chain and validate them. However, this has proven to be resource-intensive and unfair to many because only those with huge capital to build massive mining rigs can profit from the venture.
While PoW requires huge computing power that consumes large amounts of electricity, PoS allots minting capacity based on the number of coins you stake.
Proof of Stake (PoS) revolves around the concept that a person can validate a block based on the number of coins they hold. This means that the more coins a person owns, the greater their minting capacity becomes and the bigger the reward they get.
How It Works
To better understand staking, you must learn first about the Proof of Work (PoW) concept used in many blockchain systems.
In the usual PoW system, transactions are fitted into a block of data. It is then validated by miners and duplicated across multiple nodes on the network.
Each block is verified by miners through the computation of mathematical puzzles. The miner who gets to decrypt the puzzle gets rewarded with the digital token. The block is then added to the whole chain to complete the recording of the transaction.
Miners with the largest crypto mining farms can get more coins, giving them a huge advantage against those with fewer machines incapable of unlocking several computational challenges. However, mining farms have been called out for consuming vast amounts of electricity equivalent to almost twice the average consumption of an entire household. The practice is also seen as unsustainable for the health of the cryptocurrency network.
On the other hand, under a system that runs the PoS concept, the minting power attributed to a user is equivalent to the number of coins staked. This means that the PoS validator (this is what miners are called under the PoS system), regardless of how powerful their computing rigs are, can only validate an amount reflective of the coins staked.
So, if you own around 1% of the total number of coins existing in the whole network, you can only mint up to 1% of the total blocks in the network. This system limits hoarding and controls the excessive use of electricity to forge blocks.
To become a validator, the user must deposit (or stake) a certain amount of coins into the network. The chance of getting selected to forge the next block in the chain becomes higher the more coins are staked.
The system may look unfair because those who own a larger number of coins are given a higher chance of earning more. However, the concept makes use of economics to balance the cost of forging each coin and the value of the reward.
Pros and Cons of Staking
Here are the advantages and disadvantages of staking cryptocurrencies:
- It doesn’t let anyone with a more powerful computing machine mine for new blocks
- Uses considerably less energy compared to PoW mining
- Prevents the hoarding made by mining pools
- No need for expensive mining rigs
- It encourages more users to set up nodes
- Maintains decentralization and strengthens network security
- The reward depends on how many coins are staked
- Somehow favours richer users who have more coins to stake
- Chosen validators may not be able to complete the task properly
Proof of Stake introduces an alternative way of minting new coins without having to build large crypto mining centres. It also resolves several security and distribution flaws in systems running the Proof of Work concept.
If you’re interested in another way of profiting from cryptocurrency, consider looking at crypto networks that use the PoS concept.