WHAT IS STAKING?

Cryptocurrencies are all the rage for good reason. They offer a good way to make money in the long run by following specific terms and processes. Cryptocurrency staking is a process by which one can have passive income from certain digital currencies. Many investors and traders already know that the main interest of staking is the fact that it provides an opportunity to win rewards by holding certain cryptocurrencies. But even if your goal is only to acquire rewards, it’s important to understand what staking is and how it actually works.

What is staking?

Staking occurs when a person commits their cryptocurrencies to a crypto protocol with the goal of receiving rewards in return.Staking allows users to contribute to the security of the network with their tokens. As a result, users receive rewards in the form of native tokens. The more cryptocurrencies the user commits, the greater the rewards received. The prizes are distributed on a blockchain, so the process of getting them is completely automatic and staking is actually a passive income.

How does staking work?

If a cryptocurrency allows it, a user can “stake” a portion of their holdings and earn a percentage reward over time. This is done through a “staking pool” which is similar to an interest-bearing savings account. While staking, there are rewards for a user’s cryptocurrency as it is used by this blockchain. 

Cryptocurrencies that allow staking rely on a consensus mechanism called Proof of Stake, and its purpose is to ensure that all transactions are verified and protected without a bank or third party overseeing the process. Once a cryptocurrency is staked, it becomes part of this process and cannot be used or traded until it is removed from this pool. Among the most well-known currencies that allow staking, we have Cardano, Polkadot, Solana, Avalanche, Tron, EOS, Algorand, Tezos.

How to do it?

The implementation process varies from one blockchain network to another. However, there is a common base.

• The process

To do staking, you need to have a certain reserve of cryptocurrencies to block in a wallet. This wallet is managed by one or more administrators chosen by the participants

after a vote, or by an algorithm, in order to avoid a centralization of the operation around the same users.

• Staking pools

The staking pools are groups of cryptocurrency holders who wish to increase their chances to validate blocks thanks to staking. Within these pools, the rewards from the operation are distributed in proportion to the investment of each. The creation of pools is a particularly useful way of staking because some blockchain networks can have high access requirements.

Pools also allow access to staking even if you do not have the technical skills to manage aspects such as configuration, maintenance or development. Pools also offer advantages in terms of flexibility. The administrators of staking pools charge a fee on the interest generated to cover their costs and efforts.

• Cold staking

This method of staking involves immobilizing one’s digital assets in a crypto wallet that is not connected to the internet; this can be a physical or hardware wallet. The method allows users to keep their cryptos secure throughout the staking operation.

This method is suitable for people who hold large amounts of cryptocurrencies and provides them with maximum protection while staking them in the network. However, as soon as the immobilized tokens are moved out of the cold staking, the gains made are automatically lost.

How to select the right staking offer?

1. The nature of the project

What is the use of the project and what need does it meet? The fundamentals are very important and give the guideline for the project. The white paper of a project normally always determines the use, the objective and the fundamentals of the project. These are the criteria that will define whether the project is interesting or not.

2. The project teams

How is the governance organized? It is important to try to find information about the composition of the teams. Which organization created the cryptocurrency? To go further into the organizational chart, are there developers working on the project? If no one is working on the development of the project, it is difficult to achieve goals.

3. The reward, the associated profitability

The person depositing their cryptocurrencies in escrow will be rewarded. This income is calculated based on the ROI (Return On Investment) of each cryptocurrency. “ROI is a value that represents, in the same way as a traditional financial investment, the average annual interest rate. 

The interest is calculated based on the amount of cryptocurrency “staked.” However, it is important to note that this ROI can vary over time depending on the state of the blockchain network, its value cannot be guaranteed.” This ROI rate often represents a reassuring or worrying point towards projects. If the ROI of a project is 5000% then it endangers the sustainability of a project in the long run, because of its uncontrolled inflation.

4. The volume of tokens on the market

The volume and quantity of tokens are important criteria for understanding the economic system set up by the project. A bad economic scheme can damage a project and can seriously handicap it in the long run. In addition, it is important to have sufficient volumes to be able to exchange, sell and use the token. On which platforms is this token listed, this allows to analyze the availability.

What are the advantages of staking?

For long-term cryptocurrency holders, staking is a way to generate passive income by putting their assets to work instead of keeping them idle. The great thing about staking is that it plays an important role in making a blockchain project more secure and efficient. 

When an investor puts some of their funds on the line, the blockchain becomes more resistant to attacks and its ability to process transactions increases. Staking is an essential part of the Proof-of-Stake consensus mechanism. In some cases, projects can distribute “governance tokens” to staking participants: they can thus play an active role by proposing ideas on future changes or updates to the protocol.

What are the drawbacks of staking?

Staking often requires a lock-in or “vesting” period, during which the cryptocurrencies used in the process cannot be moved. This is a disadvantage, as these users are not allowed to trade their tokens in staking, even if the market turns bullish and the price starts to rise. It is highly recommended that anyone interested in staking do their own research on the rules and requirements for staking for each project before getting involved.

Conclusion

Staking is a way to increase the amount of cryptocurrency one holds without having to do anything. By adding their coins to a project, not only do users get rewards, but they also help make this blockchain more secure and efficient through the consensus mechanism called Proof of Stake.

But before putting their assets on the line, it is necessary to carefully evaluate the market trend because if it becomes bullish and excellent opportunities for gains arise, the user will not be able to use these coins because they are locked in the staking.