What exactly is staking?
Staking cryptocurrency is a method of earning interest or rewards by securing your coins for a set period of time. Staking, like many other crypto issues, can be easy or complex depending on the context and how deep you dig. Some cryptocurrencies, like as Cardano, rely on staking to secure the network, and some exchanges allow you to “soft stake” multiple coins for interest. Despite the fact that both scenarios utilise the term “staking,” they are functionally extremely different and should not be misunderstood.
Staking and soft-staking both allow you to earn with crypto by holding it for a set period of time, but soft-staking works differently with each exchange. This article explains how some blockchains work.
The Process of Staking
Cardano, Cosmos, Tezos, and, shortly, Ethereum 2.0 are some examples of blockchains that support staking natively. I'll use Ethereum 2.0 as the major example in this post because it's the largest project attempting to replace mining with staking.
Because these cryptocurrencies employ users' coins to secure the network, they compensate them for staking them. These networks use a Proof of Stake consensus system, which is different from the Proof of Work methodology used by Bitcoin and Ethereum. Let's go over what consensus methods are first in order to fully comprehend Proof of Stake.
Protocols of Consensus
Without first explaining consensus mechanisms, it's difficult to explain why staking occurs. Banks are able to handle all of their transactions and accounts because they have a central point of control that controls the entire process; whether you deposit a check or send money to someone, a bank employee verifies that the transaction is valid. Most cryptocurrencies, on the other hand, are decentralised, which means they are managed by no single entity.
Although the lack of a central point of control has numerous advantages, it also raises the essential issue of guaranteeing that all transactions are genuine and that the majority of participants — known as nodes — agree on the status of the network at any one time.
Stakeholder Proof
When compared to Proof of Work (PoW), Proof of Stake (PoS) promises increased speed and efficiency while lowering the amount of energy required to function. Rather than having miners compete to solve cryptographic math problems, currency holders authenticate transactions by putting their money on the line to guarantee the authenticity of the transactions in a new block.
Miners who previously invested computational power in the hopes of adding a new block to the chain will now stake coins they already own in exchange for the same chance. Staking allows a person to construct a validator node and participate in the network's consensus maintenance.
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