Staking is a term commonly used in the cryptocurrency world, which means holding coins to earn rewards. But not just any rewards. Rewards in crypto for securing the network and processing transactions on the blockchain.
Cryptocurrencies can be “staked” only on proof of stake (POS) blockchains. Instead of using proof of work (POW) systems, which require miners to verify transactions on a blockchain network, staking uses a proof of stake (POS) mechanism to validate transactions. In this blog post, we will explain what staking is, how it works, and how you can participate in staking to earn rewards.
What is Staking?
Staking is a process where users hold and lock up their cryptocurrency in a blockchain network to help secure and validate transactions. By staking, users can earn rewards for their participation in maintaining and securing the network. This underpins the decentralized aspect of the blockchain network.
Beyond security, staking has become a popular way for cryptocurrency holders to earn passive income, and it's relatively easy to get started. The mechanism replaces the traditional miner reward system and helps reduce the carbon footprint associated with mining using POW.
Staking is the most crucial part of the POS system. It helps maintain the security and integrity of a blockchain network.
Proof of Work vs. Proof of Stake
Before we dive into how staking works, let's briefly discuss the difference between:
1. Proof of work (PoW)
In a PoW blockchain, miners solve complex mathematical problems to validate transactions and earn rewards, whereas, in a PoS blockchain, validators lock up their cryptocurrency holdings as collateral to validate transactions and earn rewards. PoW is energy-intensive and requires a significant investment in hardware, making it less accessible for the average user.
Bitcoin is a PoW blockchain, which means that miners must solve complex mathematical problems to validate transactions and earn rewards in the form of Bitcoin. The more computing power a miner has, the higher their chances of solving the problem and earning the reward. This system is energy-intensive and requires a significant investment in hardware, making it less accessible for the average user.
2. Proof of stake (PoS)
In a PoS blockchain, validators lock up their cryptocurrency holdings as collateral to validate transactions and earn rewards. Validators are chosen based on the amount of cryptocurrency they have staked, and the network is secured by a collective stake of validators. PoS is generally considered more energy-efficient and accessible than PoW, as it doesn't require expensive hardware and can be done with lower energy consumption. Ethereum transitioned from PoW to PoS following the Ethereum 2.0 upgrade.
The drawback with PoS is – it has centralization risks as validators are chosen based on the amount of cryptocurrency they have staked, which may lead to a concentration of power among the wealthiest validators
How does Staking Work?
In a staking system, networks randomly choose validators to create blocks and confirm transactions. Validators must hold a minimum amount of cryptocurrency as collateral and keep their staking wallets online and synced to earn staking rewards. These rewards are distributed in the form of cryptocurrency to the validators who play a part in securing the network. Validators also risk losing their collateral if they fail to validate their transactions in time or create fraudulent blocks intentionally.
For example, in order to participate in the proof of stake process in the Ethereum blockchain, one must run a node, and 32 ETH are required to run an Ethereum node.
Participating in Staking
If you're interested in participating in staking to earn rewards, here are the steps you need to follow:
1. Choose a Staking Medium
To stake cryptocurrencies, one can either:
- Stake directly with the blockchain
- Use a liquid staking service
- Use an exchange
But in order to access any of these, a crypto wallet is required to store and send cryptocurrencies. For instance, you can custody your crypto on the Frontier wallet and connect to staking services.
2. Choose a Cryptocurrency to Stake
Next, you will need to choose the cryptocurrency you want to stake. Many cryptocurrencies offer staking, including – Ethereum, Solana, Cardano, and Polkadot, etc. The list of cryptocurrencies with their staking rewards are mentioned here.
3. Buy Cryptocurrency
If you don't already own the cryptocurrency you want to stake, you will need to buy it. You can purchase cryptocurrency using a crypto exchange like a decentralized exchange like Uniswap or Sushiswap, or a centralized exchange like Binance or Coinbase.
The Frontier Wallet connects directly to decentralized exchanges. You can buy POS cryptocurrencies and custody them right from your mobile wallet.
4. Transfer Cryptocurrency to your Staking Wallet
Once you have purchased the cryptocurrency, you will need to transfer it to your staking wallet. Be sure to choose the correct address and network to avoid losing your funds.
5. Start Staking
After transferring your cryptocurrency to your wallet, you can start staking. Choose the option for staking available in your wallet, and follow the prompts to begin.
How to Maximize Staking Rewards
To maximize staking rewards, you need to pay attention to a few things:
1. Choose the Right Cryptocurrency
Some cryptocurrencies offer higher staking returns than others. Research well and pick a cryptocurrency with a good return on investment (ROI).
2. Choose the Right Staking Pool
Staking pools are groups of validators who combine their resources to increase their chances of creating blocks. Staking pools make achieving successful consensus more accessible and reduce the risks and complications of working solo. Joining a staking pool can help minimize the risk associated with holding onto collateral.
3. Keep Your Staking Wallet Online
Ensuring your staking wallet is always online and synced is crucial. Validators go offline without reasons from time to time, increasing their chances of losing their collateral and rewards.
4. Stay Alert
Cryptocurrency market changes rapidly. Keeping up with the latest market information and understanding network upgrades can help optimize your staking process to earn higher and more sustainable rewards over time.
Is Staking For You?
Staking provides a way for crypto holders to earn rewards while contributing to a blockchain network's security. By following these steps and paying attention to the critical factors, anyone can participate in staking and take advantage of the potential rewards.
If you're a new crypto user, staking can be a great way to start earning passive income, and it's also a sustainable alternative to mining on the ecosystem.
Want to buy POS cryptocurrencies? Download the Frontier App here.