What is Staking? What does It do?
In cryptocurrency markets, the concept of staking refers to keeping a cryptocurrency locked in a wallet for a certain period of time. Depending on the staking method and platform, users may win rewards or earn income from the process.
If you have questions like what is staking or what does staking do then you will find the answers in this article.
What is staking?
Staking refers to keeping a specific coin or token in a cryptocurrency wallet for a period of time without spending, transferring or using it for other purposes. During the process, users that store the cryptocurrency in their wallets and meet the conditions earn rewards for holding it. Staking rewards are calculated differently on each blockchain network. When calculating rewards, the variable factors are things like the number of validator-staked crypto assets or the volume of cryptocurrency staked on the network.
The differences between mining and staking
In a mining system, miners generate cryptocurrencies using the Proof-of-Work mechanism. In a staking system, validators generate cryptocurrencies with the Proof-of-Stake mechanism.
Miners use special hardware devices to solve complex mathematical problems, verifying blocks on the blockchain. For staking, validators lock crypto assets to nodes in the network, verifying blocks on the system.
Blocks verified by miners are added to the blockchain. Miners then receive cryptocurrency as a block reward in return. Blocks verified by validators are added to the blockchain. Validators earn cryptocurrency by receiving a cut of transaction fees.
The amount of blocks miners verify depends on their computational power. The amount of blocks users verify depends on the amount of crypto assets they have locked into nodes.
Mining is carried out with hardware devices with high specs and performance. High performance hardware devices are not necessary for staking.
What does staking do?
Staking was developed as an alternative to the processing-power intensive mining system. The concept of staking emerged in the cryptocurrency industry with the Proof-of-Stake protocol — a response to Bitcoin’s Proof-of-Work protocol. The Proof-of-Stake protocol is focused on eliminating problems like the high energy consumption required for Bitcoin mining. With staking, the amount of cryptocurrency left in circulation is when coins or tokens are locked in. This can increase the value of the cryptocurrency because it alters the supply-demand balance.
What is Proof-of-Stake?
Developing as an alternative to Bitcoin’s Proof-of-Work protocol, Proof-of-Stake (PoS) is a protocol that prioritises digital asset ownership over pure computational power.
In a Proof-of-Stake protocol, users who wish to verify transactions and gain a cut of the project revenue must lock in their cryptocurrency holdings, in turn verifying blocks. In this process of locking-in, called staking, staked assets cannot be withdrawn from the wallet until it is unlocked and and the network confirms that previously staked amount belongs to the user.