Staking is a new form of investment where you can earn while you sleep. Basically, staking is the act of locking your cryptocurrency on a wallet to sustain the maintenance of proof-of-stake-based operations within the blockchain system. It is essentially similar to cryptocurrency mining that aims to achieve consensus while giving rewards to participants.
To easily understand what staking is, let me give you a brief background about blockchain.
A blockchain is the ledger or record book of information online. The information included in the blockchain is provided, monitored, and checked by people worldwide. The thing is, there’s no guarantee that all the participants in the blockchain are noble. Surely, there will be quite a few who will try to disrupt the blockchain data for their own benefit.
Securing the Blockchain
Let’s take NBA games, for example. To enter and watch the game, you need to pay for an entry ticket. If you behave nicely inside the stadium, you will be able to stay until the game ends. However, if you fool around, do nasty things, and disturb the game, you will be forced out even when you pay for the ticket. This is how staking security works.
Technically, you pay a certain amount to enter staking. If you follow the necessary conditions that need to ensure, you will gain a reward by the end of the locking period. The only difference with the first example is the first one depended on reputation, on behavior. But when it comes to staking, it is the monetary value that is involved.
For example, you buy stake coins and lock them out for staking. So, you got the chance to participate in the blockchain, enabling you to add new information through proof-of-stake.
If you do well during the staking period, you will be getting more cryptocurrencies (rewards). If you misbehave in the blockchain during the staking period, your cryptocurrency holdings might get cut down or taken away from you (punishment).
The reward and punishment both involve money.
In simple terms, stakes secure the blockchain by playing to play, rewards, and punishments. Participants in the stake could be the bad actor. However, they are also the ones who have the capacity to secure it.
Bitcoin’s Proof of Work (POW)
Bitcoin’s proof of work secures the blockchain. In order to participate in the blockchain, instead of locking a cryptocurrency, you need to invest in powerful computer equipment and electricity. In return, you will get a reward— a newly created cryptocurrency.
If you do an offense against the condition of proof of work, you will end up wasting electricity, which costs a lot of money, receiving no rewards at all. Just like staking, securing blockchain through proof of work is also a matter of paying to play, rewards, and punishment.
Cardano’s Blockchain
Cardano claimed that they didn’t need a punishment like slashing to secure their blockchain, unlike proof of work and proof of stake that includes both rewards and punishment. This is because of their implemented reward-sharing system that promotes first-class decentralization, where each and every stakeholder are economically motivated to act rationally.
With the kind of environment that they provide for their blockchain, it’s almost unlikely that participants will foolishly behave. Even if some participants dare, it’s most likely that they will form just a small group.
Until now, no one knows if Cardano’s “no punishment” system will work in the long run.
Proof of Authority
Bitcoin’s proof of work immerses monetary value in rewards and punishment, while Cardano gives rewards according to reputation but no punishment otherwise. Now, proof authority is the combination of both.
Proof of authority grants faster transactions for participants based on their identity as a staker. If a participant has a good reputation on the blockchain, not having any bad record (reputation), it’s most likely that the participant will receive a good monetary value (reward).
Some blockchains require no monetary value as a stake. However, these types of blockchain give no rewards at all.
To sum it all up, stakers secure blockchain by paying to play, rewards, and punishment systems. If the blockchain is decentralized, the reward and punishment will be tied up in monetary value. If it’s centralized, it will solely be based on your reputation.
Cryptocurrency exchanges like Coinbase or Binance mostly back up centralized staking services. Participants just simply transfer or deposit their desired staking amount into the exchange, and the company will handle everything else. The participant only needs to wait for the reward.
Centralized staking service providers enable a very easy process of staking. However, this comes with a disadvantage for participants. The exchange will be in the custody of your cryptocurrency (though it’s still yours), so they can reduce your rewards and give you slashing penalties.
On the other hand, decentralized staking services exercise trustless practice for staking, so they do not take custody of the staking participants in any way possible.
Exchanges that offer staking services are generally open for anyone who are willing to join. If you are interested, know that the amount of cryptocurrency you will stake will be nontransferable and uninvestable for a definite period of time. Even if the market is doing well with the price shifts, you won’t be able to use your staked coins to trade.
The adaptation of both centralized and decentralized stalking seems to be at an all-time high as the decentralized finance (DeFi) keeps on flourishing. Despite the popularity that they receive, bear in mind that crypto staking also comes with significant risk. Since that’s the case, thorough research is crucial before actually investing money.
