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What is Staking Crypto and How Does it Work?
- By Localcoin
- November 15, 2021
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“Staking crypto” has emerged as a new way to earn cryptocurrency rewards and as a viable alternative to crypto mining. But what is staking crypto and how does the process actually work? Also, how does it compare to crypto mining and is it really a viable alternative? Let’s clear the air and find answers to your questions about staking crypto!
Browse This Content:
- A Recap on Crypto Mining
- This Proof-of-Work Protocol Isn’t Perfect Bitcoin Quick Facts
- What is Staking Crypto?
- What Coins Use the Proof-of-Stake Model?
- What Are the Benefits of Staking Crypto?
- What Are the Disadvantages of Staking Crypto?
- Get Involved in Cryptocurrency With Localcoin!
A Recap on Crypto Mining
Before getting into what crypto staking actually is, let’s cover a few key points about crypto mining.
Crypto mining is the process of validating transactions on the blockchain using a proof-of-work (PoW) protocol. Using large amounts of computational power, miners verify the legitimacy of cryptocurrency transactions by solving for their encrypted hash values (in other words, by solving complex mathematical problems). Once solved, blocks of transactions are considered verified and are permanently added to the blockchain where they are immutable, irreversible and visible to everyone on the network.
In return for verifying transactions and adding new transactions to the blockchain, successful miners receive newly minted coins. For Bitcoin mining in particular, miners have to verify 1MB worth of transactions and they must be the first to arrive at the right value in order to be rewarded with coins. This may sound like a pain-staking process, but mining is vital to upholding the blockchains that facilitate coin transactions, maintaining decentralization and circulating newly minted coins.
This Proof-of-Work Protocol Isn’t Perfect
While crypto mining has been both successful and profitable, the PoW protocol is not without its faults. It’s no secret that crypto mining consumes a lot of energy by rewarding those with the most computing power. As a result, crypto miners aren’t just enthusiasts with small mining rigs at home. Crypto mining has emerged as its own industry with digital mining companies (some that are even publicly traded) and giant data centers around the globe. As of October 2021, the annual carbon footprint of Bitcoin mining alone is estimated to be higher than the annual consumption of Finland as a whole. Plus, as Bitcoin halves and rewards for mining get smaller over time, eager miners will have to use even more computing power to make the same amount of profit.
Bitcoin Quick Facts
- It’s estimated that the average energy consumption required for one Bitcoin transaction equals several hundreds of thousands of VISA transactions.
- The U.S is predicted to become the new Bitcoin mining capital of the world with cryptocurrency transactions now banned in former capital China as of September 2021.
With the sustainability and scalability of crypto mining in question, an alternative protocol is surely needed.
What is Staking Crypto?
Crypto staking was created in response to the concerns around crypto mining’s PoW model. Staking requires using a different protocol called the proof-of-stake (PoS) model where participants put their coins at “stake” for the chance to confirm new transactions, add new blocks to the blockchain and earn newly-minted coins.
The process of staking involves pledging a portion of your own crypto assets to the coin’s network and locking them up for a period of time for the chance to be rewarded with newly minted coins, similarly to how gaining interest works through a bank. This process can have benefits for both the coin’s network and the user who stakes their crypto assets:
- For the network, temporarily taking coins out of circulation helps to limit the coin’s supply in hopes of driving up its price.
- For the user, the more coins they put at stake, the better chance they have at being selected by the PoS protocol to verify new transactions, add new blocks to the blockchain and get rewarded with coins.
Unlike PoW, the PoS protocol does not incentivize or demand large amounts of energy usage. Instead, PoS incentivizes participants to hold more of the coin. In this model, the amount of newly minted coins a successful participant is rewarded with is directly related to how many coins they put at stake.
What Coins Use the Proof-of-Stake Model?
Many cryptocurrencies are adopting the proof-of-stake model and rewarding the process of staking crypto. Ethereum 2.0, Cardano and Solana are some of the largest crypto coins that are now using this new protocol.
What Are the Benefits of Staking Crypto?
The biggest advantage of crypto staking is how it aims to address the concerns around crypto mining’s sustainability. Not only is the process more environmentally friendly, but it also makes crypto staking a more accessible way of acquiring newly minted coins.
Without the need to buy, set up and run complex and expensive mining rigs, staking crypto allows everyday crypto enthusiasts to participate in the process of verifying crypto transactions through online cryptocurrency exchanges or even with some offline wallets. Crypto staking offers investors an entry-level way to put their crypto holdings to work and essentially earn “interest” on their assets. As further incentive for participants, stakers have input on the future direction of a coin and can have their say when changes are proposed for the network.
What Are the Disadvantages of Staking Crypto?
Crypto staking isn’t a perfect protocol, either. While staking is mostly barrier-free, it requires participants to pay a portion of their crypto staking rewards in fees. And although it’s a very hands-off method of earning “interest”, it still involves a level of risk. This is because cryptocurrency markets are volatile and when you lock up staked assets, there could be negative price movements that you cannot act on, possibly outweighing the rewards you receive for staking.
What’s more, you may have to wait an additional period of time when you want to retrieve your staked coins. Participants must also be wary of the possibility of “slashing” penalties: stakers can incur penalties for misbehaviour on the network, and this can also happen completely by accident if someone doesn’t really know what they’re doing.
All in all, in order to stake crypto safely, enthusiasts should take the time to get familiar with the process and these potential hiccups.
Get Involved in Cryptocurrency With Localcoin!
Mining and staking both come with their own advantages and disadvantages. For those who want to get involved in earning rewards on their assets, the first step is to buy your own cryptocurrency. Localcoin ATMs offer an accessible, user-friendly and secure way for anyone to buy and sell cryptocurrencies in their communities. Newcomers and experts alike can easily access Localcoin ATMs when and where they need to. As Canada’s largest Bitcoin ATM network with more than 650 terminals across Canada and the U.S, it’s never been more convenient to buy and sell cryptocurrency.