UpBots Academy: What is staking?
In today’s article, we’re going to talk about a very interesting topic, staking! You’ve all heard about it without understanding how it works, no worries we’re here for that! Are you ready? Here we go!
What is staking?
Staking is the act of tying up one’s crypto-currencies in a smart contract in order to participate in the operations that take place on a blockchain. With staking, all you need to do is hold cryptocurrencies in a wallet in order to be remunerated by the network and thus earn passive income. Staking is similar to mining in the sense that they reward users for participating in the security of a decentralized network. You will thus store your crypto while enjoying benefits.
Differences between POS and POW
PoW (Proof of Work) is the mechanism that allows transactions to be validated and then collected into blocks. These blocks are then linked together to form a blockchain. In this mechanism, miners lend the computing power of their computers to the network to solve a complex mathematical problem. The first to solve the problem gets the right to add the next block to the blockchain. This way of doing things is of course very energy consuming and has already been the subject of much criticism. The Proof of Stake (PoS). In this mechanism, participants lock their tokens. The protocol then assigns the right to validate a block randomly to one of the participants. In PoS, the probability of being chosen to validate the block is proportional to the number of locked tokens. Thus, the more locked tokens the user has, the more likely he is to be chosen to validate the transaction.
How to do staking?
There are several ways to staking as the platforms offering this possibility have multiplied. Be careful though, not all of them offer the same level of security.
Staking on DEX
You can choose to do staking on a DeFi exchange platform, but you should know that this solution, although generally paying more than the CEX, also involves more risks. DeFi protocols are generally more prone to hacks and exploits than large exchange platforms. In addition, this approach is a bit more complex for advanced beginners.
Staking on CEX
Almost all big exchange platforms now offer staking solutions. On Binance or Kucoin for example, it is very easy to start staking your crypto-currencies. For some, it is not even necessary to have a “lock” period, meaning that you can remove them whenever you want.
Staking cryptocurrencies is not without risk, as you often have to stake them for a fairly long period of time and therefore expose yourself to market fluctuations and volatility. You will therefore have to define your own acceptable risk/return ratio before you start.