With the growing adoption of blockchain technology, investors are exploring new ways to engage with digital assets beyond just trading. One technique is staking which allows crypto holders to help secure the network. It is essential to understand its working and implications of staking as more platforms incorporate it.
What is Staking?
Staking is the process through which blockchain networks secure and authenticate transactions. To maintain the decentralization and security of the network, holders of cryptocurrency need to lock up their assets.
It makes use of Proof-of-Stake (PoS) rather than resource-intensive mining in which candidates need to verify transactions are chosen on the basis of the amount of cryptocurrency they have and are willing to stake. By this method, blockchain security could be maintained in a more ecologically responsible and energy-efficient manner.
Advertisement
How it Works
1. Purchase the Required Cryptocurrency
To begin staking, you first need to buy the cryptocurrency that the blockchain network requires for staking. The staking procedure uses the native coin of each blockchain. This cryptocurrency is available for purchase through peer-to-peer transactions or exchanges.
2. Set Up a Compatible Wallet
As soon as the crypto has been protected it must be kept in a wallet that supports staking. The wallet will keep your staked assets in safe custody. It could be a hardware wallet, a software wallet with staking capabilities, or an exclusive staking wallet, depending on the blockchain.
Advertisement
3. Lock Your Cryptocurrency for Staking
In staking, your crypto will lock in place for a predetermined amount of time. This locked-up crypto serves as collateral, ensuring that you are committed to respecting the network's protocol. As a result of the network allowing you to be involved in its operation, you are eligible for staking rewards.
4. Receive Staking Rewards
Stakers earn rewards for helping secure the blockchain. These rewards come from transaction fees or new tokens minted by the network. Validators who process transactions and create new blocks get a portion of the rewards, and if you delegate your coins to them, you also receive a share of the staking rewards.
Advertisement
What to Consider Before Staking Your Crypto
Before choosing to stake, investors should think about important factors. Anuj Chaudhary, Cardano Blockchain Lead, India, highlighted several important considerations:
He said: “It is essential to compare staking benefits with financial goals as returns vary. Investors should also watch out for lock-up periods that limit liquidity, understand slashing risks, and choose between liquidity and locked staking.”
He emphasized that it is also important to assess its risk, saying: “While staking provides passive income, it carries risks like restricted access to locked funds, penalties from unreliable validators, and market fluctuations. It is generally safer than trading, but investors should proceed with caution.”
