Cryptocurrency adoption has surged remarkably over the last few years. It is reported that the total value of cryptocurrency assets globally now stands at US$2.2 trillion. That is a staggering figure considering that the first cryptocurrency, Bitcoin, came onto the scene in 2009. There is also lots of buzz in the blockchain space with so many innovations coming on board. NFTs and Cryptocurrency ETFs were given the green light in the US.
There is also lots of activity regarding central bank digital currencies. Nigerian just recently adopted one which is a notable game changer. Here in Zimbabwe, there is Zimbocash (Zash) which is making its way towards being fully operational. There are several ways to make money via cryptocurrencies and blockchain. I recently wrote an article on that but I deliberately left out staking. That required an entire article on it, so here goes.
Staking Defined
Staking entails the locking up (or holding) of one’s cryptocurrency assets for a certain period of time. (Do not mistake this for the ordinary holding you are accustomed to. The assets will be locked up by the blockchain). You do this for the earning of interest or rewards. This means those locked up cryptocurrency assets seize to be in circulation for that period. For that time you will not be able to withdraw them. You probably might be wondering what then does one benefit from that. You could also wonder how exactly that is a good thing. Well, there are upsides of locking up one’s cryptocurrency assets – will deal with that later on.
Why Staking?
Increasing Coin Value
You do know the simple principle of limited supply equals more value right? Staking contributes towards that principle since the staked coins will be out of circulation. So that is one of the upsides of staking in that it can drive up the value of the cryptocurrency in question.
Operational Protocol Of A Blockchain
This is a technical aspect but let me try to be as simple as possible. There are broadly two operational protocols in the cryptocurrency world. These are protocols used to validate transactions on a blockchain. These are proof of work and proof of stake. Underproof of work, nodes (i.e. miners) on a blockchain scramble to validate a transaction. Whoever validates it first earns and also gets to create the block that makes way for the next transaction.
Under proof of stake, it is those who stake that are considered for validating a transaction. Randomization is of course used, and if you are picked you validate, earn and create the block that makes way for the next transaction. Having a high number of staked coins does increase your chances of being picked – key to note! So staking is central to proof of stake which is pivotal in the smooth running of a blockchain. For your information, Ethereum is planning to migrate from proof of work to proof of stake as its operational protocol.
Benefits To You
Earning Rewards Or Interest
The obvious ones are earning rewards or interest. Rewards can come in the form of you either earning a percentage interest (on staked amount) or simply getting more coins. You know that in cryptocurrency there is buying and holding plus trading also. These are both ways to grow your coins or cash out on them. These two ways are tasking and require lots of careful analysis. What those two ways seek to achieve is more or less what staking seeks to achieve. The same applies to crypto mining as well. You are seeking to earn more or grow your coins. However, staking is way easier and less tasking. Once staking is done all you just do is sit back and relax and start seeing the fruits.
Having A Say In How A Cryptocurrency Is Run
That is one of the benefits you can enjoy from staking. Once you stake some of your crypto assets you in essence earn the privilege to have a say. I can equate it to someone having a say in a company because they have availed equity financing to it. Given our subject matter, you would be the equity financier and the cryptocurrency company. Once you stake it is as if you have assumed a stake in the cryptocurrency. So you become a voice that gets to contribute is key decisions regarding how a cryptocurrency is administered.
Some Important Things To Note
Staking is not applicable to every cryptocurrency in existence. The rough figure is that about 70 percent of top currencies can be staked. Another important thing to note is that it is safer to stake via an exchange. Staking on your own can be somewhat tricky because you can make mistakes. Such mistakes are costly because you can be fined for them. In principle, part of your staked crypto assets can end up servicing that fine.
Bear in mind also that staking is not free. If you do it on your own there are many hardware and software resources you will need to acquire. In the event that you stake through an exchange, you are charged to pay something. It is more or less similar to minting an NFT where what part of what you earn will go towards services that charge.
Staking can be done easily either through exchanges or wallets. Examples of crypto exchanges where you can stake through a few clicks are Kraken and Binance. An example of a crypto wallet where you can do this is Trust Wallet.
One of the key takeaways you must grasp is that staking is a cheaper and easier option to mining. The most straightforward analogy to staking is equity financing. By staking it is like you are financing a cryptocurrency to have a stake in it and to earn later. Hopefully, this article has built a base knowledge for what staking is. If mining is too out of reach for you, you can explore staking.
