What is Staking?
What it is
Staking is a popular topic in Cryptocurrency right now. It benefits investors, helps keep everyone’s money secure, and even promotes environmental awareness.
Staking is an investment that rewards you with interest and confirms transactions.
In order to stake, someone “loans” some of their cryptocurrency to the blockchain network for a specific period of time. During this time the loan accrues interest. At the end of the staking period, the staker reclaims their original investment and the accrued interest.
In many ways, staking resembles a short-term bond. But instead of loaning money to the government, you’re loaning cryptocurrency to the network so that you can be held accountable to validate transactions.
How it Works
There are many advanced technical factors behind staking. However, two basic ideas underlie the whole process.
- Staking discourages fraudulent transactions.
- Staking rewards people for validating transactions.
Cryptocurrency doesn't rely on social institutions for security and legitimacy. So it needs clever ways to verify transactions without laws, banks, or companies to maintain them.
Staking does this by having others validate transactions on the network.
When someone stakes their cryptocurrency, they are giving themselves a chance to become a validator.
A validator’s job is to tell the difference between good and bad transactions, only allowing the good ones to go through.
Every set of transactions has many validators. They have an economic incentive to only allow good transactions through the network because they will lose a portion of their stake if they do not.
In order for a group of transactions to be fully accepted by the network, it must be validated by more than 50% of the validators.
Crypto-lingo calls this Proof-of-Stake (PoS) and it is an important mechanism for authenticating money-flow across the network.
For Ethereum, a person must stake more than $100,000 to become a validator, so any validator has ample motivation to only accept good transactions.
However, you can stake cryptocurrency without becoming a validator by joining a staking pool. The rewards are not as high, but you won’t have to break the bank with your initial investment.
How You Can Benefit
The primary benefit to staking is that you earn money by doing it. Because staking is a relatively new financial tool, the interest rates are huge. USDC, a cryptocurrency pegged to the price of a dollar, can be staked for over 8% APR.
Additionally, you help the network by staking. You are assisting validators, making it more difficult for fraudulent transactions to happen.
Finally, staking is environmentally conscious. Staking is the alternative to mining, which consumes insane amounts of energy. The same cryptocurrency network that uses staking instead of mining consumes 1/1000th of the electricity. This is the difference between powering an entire country and powering a couple thousand homes.
Staking provides a way for anyone to earn money and help the network safely verify transactions. It is profitable, charitable, and considerate for you and everyone else involved.
By promoting digital honesty, you never have to stake your bets on centralized banks or business to enjoy financial security and satisfaction.
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