Staking the cryptocurrency
industry is the act of locking cryptocurrencies to receive rewards. It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. In other words, staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn staking rewards, they are known as validators, instead of Miner in proof-of-work. Staking is a less resource-intensive alternative to mining.
Proof of Stake and staking opens up more avenues for anyone wishing to participate in the consensus and governance of blockchains. Furthermore, it’s an utterly easy way to earn passive income by simply holding coins.
How does staking work?
When the minimum balance is met, a node deposits that amount of cryptocurrency into the network as a stake, similar to a security deposit. The size of a stake is directly proportional to the chances of that node being chosen to forge the nextblock. If the node successfully creates a block, the validator receives a reward, similar to how a miner is rewarded in proof-of-work chains. Validators lose part of their stake if they double-sign or attempt to attack the network. Usually, participants that stake larger amounts have a higher chance of being chosen as the next block validator.
Each blockchain network may use a different way of calculating staking rewards. Some are adjusted on a block-by-block basis, taking into account many different factors, including but not limited to: how many coins the validator is staking, how long the validator has been actively staking, how many coins are staked on the network in total, and the inflation rate.
A staking pool is a group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the rewards proportionally to their contributions to the pool.
Staking pools tend to be the most effective on networks where the barrier of entry (technical or financial) is relatively high. As such, many pool providers charge a fee from the staking rewards that are distributed to participants.
Other than that, pools may provide additional flexibility for individual stakers. Typically, the stake has to be locked for a fixed period and usually has a with drawalor unbinding time set by the protocol. What’s more, there’s almost certainly a substantial minimum balance required to stake to disincentivize malicious behavior.
Most staking pools require a low minimum balance and append no additional withdrawal times. As such, joining a staking pool instead of staking on their own might be ideal for newer users.
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