Ever since mainstream media picked up the Bitcoin energy consumption issues, the Proof of Work (PoW) consensus mechanism has become the talk of the town. Even though energy consumption through Bitcoin mining is a nuanced issue, most fail to understand the depth of the topic.
However, with all the conversations around energy consumption associated with Bitcoin mining and the PoW consensus algorithm, the world is waking up to another consensus mechanism that uses minimal energy – Proof of Stake (PoS). So, in this blog post, we’ll try to understand crypto staking (Proof of Stake) and its benefits over crypto mining. So here we go:
What is Crypto Staking?
In simple terms, staking is an act of locking up your crypto assets for a given period of time to support and secure a blockchain network in exchange for earning rewards. Staking can be seen as an energy-efficient alternative to mining. So how does it actually work?
Understanding Proof of Stake
To get a better grasp of staking, we need to delve deeper into the Proof of Stake consensus mechanism. A consensus mechanism is basically a methodology to achieve consensus or agree on a common network state by all its participating nodes. Just like in a democratic nation, citizens and politicians participate in elections to reach a consensus to elect a president or prime minister.
Now let’s get back to the Proof of Stake. The Proof of Stake consensus mechanism was first introduced on the BitcoinTalk forum by a user named QuantumMechanic. This new consensus mechanism paves the way for all the participating nodes to agree to a common state of the network without running the race to solve a complex cryptographic puzzle.
In the proof of stake (PoS) mechanism, the participating nodes are called validators. To participate in a PoS network and become a validator, each participant needs to deposit a certain amount of the network’s native tokens as a stake. The given stake acts as a safety deposit and allows the nodes to earn the rewards (in the form of transactions fee) by validating new blocks on the network.
Unlike the proof of work mechanism, proof of stake (PoS) is less resource-intensive, offers high transaction throughput, and is not prone to 51% attacks.
So, if you’re just holding any crypto assets (running on PoS blockchain) in an exchange or wallet, you can earn additional rewards by staking them into the network. Now the question arises, how to stake your crypto? Let’s find out.
How to Stake Your Crypto Assets?
Staking can be seen as an easy way to earn passive income through your idly lying crypto assets. So how can one stake their crypto assets and earn rewards? Well, there are two ways to stake your crypto assets – Staking & Delegating.
As we discussed earlier, staking is a mechanism for facilitating transactions on a blockchain. Therefore, in order to stake and earn rewards, users need to download and run the node (software application) to share the responsibility of keeping the network running smoothly. Hence, users need to ensure the 100% up-time for their node backed by uninterrupted internet and electricity.
If a node tries to break the network’s rule or goes offline; the network will automatically penalize the user by slashing her stake.
However, if you’re not in a position to run a node, you can simply delegate your funds and earn rewards without worrying about being online or 100% up-time. Delegating is a way to indirectly participate in staking through a node operator.
In the case of delegation, anyone can simply choose a node operator from the network’s list and delegate their funds to earn passive income without worrying about running a node. Even though the process of delegation can be different depending on the blockchain network, it’s easy as pie.
To learn more about the process of staking for the choice of your crypto token and respective rewards, check out https://www.stakingrewards.com/