E Beginner’s Guide To Cryptocurrency Staking

In response to the innumerable problems caused by Bitcoin’s consensus algorithm i.e., Proof-of-Work (PoW), several alternatives have been in continuous development. Proof-of-Stake or PoS is one of the mechanisms that has gained the highest attention so far.

Proof-of-Stake is a consensus mechanism that does away with the great energy requirements of PoW and replaces it with a staking-based mechanism. In PoW, miners are network participants that provide computational energy to secure the network, and get a reward in exchange. In PoS, the securing mechanism is carried on by ‘Stakers’. Instead of promising scrupulous amount of energy to the network, Stakers secure the network by ‘Staking’ certain amount of network tokens.

Staking is a two-way mechanism wherein the network is secured by users locking tokens to show confidence, in return for which, the stakers are rewarded by the network based on the amount of stake provided.

Let us now see how Staking is done and how one can profit by staking in a network, without the hassles of looking after hardware or any grave complexity.

Staking Simplified - Earning from Giving

Proof of Stake is a consensus method that essentially replaces mining with token ownership. Instead of having to perform complex calculations, a token holder participates in block creation by “staking” their tokens, i.e. keeping them locked in a specific location and not being able to spend them. The staker is then granted a reward, which could take the form of transaction fees or a block reward, based on the new tokens generated for blocks their stake helped create.

Proof of Stake takes away the energy and computational power requirement of PoW and replaces it with a stake. A Stake is referred to an amount of currency that an actor is willing to lock up for a certain amount of time. In return, they get a chance proportional to their stake to be the next leader and select the next block, ultimately gaining the network reward. In essence, one earns rewards by giving or locking funds in a network. You are paid for giving.

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