You have probably heard people say how they make money trading cryptocurrencies. Sure, it is an excellent way of raking in some returns, but there is a passive method of raking even more: staking. The technique has become very popular as more people now agree that cryptocurrencies come with huge benefits and are here to stay. So, how exactly does crypto staking work? What is the proper staking definition? How is it different from mining? Keep reading to get answers to all of these questions, plus a lot more about staking.
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A Deeper Look at Blockchain and Cryptocurrencies
Before looking at the staking definition, it is essential to start by understanding the blockchain and cryptocurrencies. So, what is a blockchain? What is a cryptocurrency?
A blockchain is best defined as a distributed ledger shared among computers (call them nodes) in a network. This database stores data electronically in blocks, which link together to create a sort of a long advancing chain. The main difference with the standard databases is that blockchain networks are not owned by any party but belong to the users on the network.
When a person makes a transaction, such as sending crypto coins on the blockchain, it is taken over by the nodes on the network, who follow back to confirm that the sender has ample coins to send. Once the information is verified, the coins will be delivered to the recipient’s wallet. Once the nodes gather information about multiple transactions within a specific timeframe, it is included in the next block. This information is permanent and cannot be altered.
Cryptocurrencies are digital coins used to power blockchains, meaning that for you to use the blockchain network, say for sending funds or lending, a fee is charged for each transaction that must be paid in the native coins. Good examples of cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), and Cardano (ADA).
To use cryptocurrencies, whether for sending value or staking, you need to have the right crypto wallet. A wallet is a device, software, or service that helps to store the coins. It also allows you to send, trade, and receive coins. When we talk about storing the crypto coins, it is not the actual coins that we know of today that are stored in the wallet; this is because cryptocurrencies are digital coins. What is stored in a wallet is a string of codes that signify the number of coins you have in a wallet. Different private keys are attached to each wallet, and it is often advised that they must be kept secret to avoid losing your coins.
Because of the long list of crypto wallets on the market today, you should be careful and only select the right one. For example, hot wallets can put your coins at a higher risk of getting lost through hacks because they are always online. You might want to compare them with cold wallets before deciding on the type of wallet to select. Visit hi.com for more options and expert assistance.
Now that you know what cryptocurrencies and blockchain are, it is time to look at the staking definition. Crypto staking is the process of locking your crypto coins in a blockchain network to help confirm transactions. Instead of letting your coins sit around in your wallet, staking allows you to commit them so that they can help with processing transactions, governance, and security. In return, you are rewarded with new coins or part of the transaction fees.
While staking, you commit your coins, not giving them out, this means that they are still yours, but they will earn some returns. Therefore, it is an excellent form of passive income from your cryptocurrencies. If the value of your crypto coins appreciates when you have staked them, you will further enjoy the increase in value.
When you decide to start crypto staking, it is important to know that not all coins support staking. Only the coins that use proof of stake (PoS) consensus protocol, such as Cardano (ADA), Solana (SOL), and Tezos (XTZ) are supported. So, you better check carefully to learn more about the best coins for staking. Consider working with hi.com to learn more about the process of staking.
Comparing Crypto Staking to Mining
Cryptocurrencies and blockchain networks are decentralized, which means they require consensus to run transactions. To further aid your understanding of what decentralization means, it means that nodes spread on the respective network have to agree when confirming transactions and on governance. The two methods used for these activities are staking and mining. So what is the difference?
For cryptocurrencies that use proof of work (PoW) consensus protocols, the method used to drive the networks is called mining. The process called mining is described as a decentralized system where the nodes spread on the network system have to compete to solve complex mathematical problems, and the first one to get the right answer grabs the opportunity to forge a new block.
Your computer must run as a node on the blockchain network chosen to help confirm transactions to start mining. The complexity of the mathematical problems used in mining keeps changing to ensure that only a few can get the answer. Forging a block can be a complex process; to easily increase your chances of generating the next block, it is important to have high-performing and proven tools to solve the mathematical problems at a favorable time.
The main shortcoming of cryptocurrencies that use mining is that it uses a lot of energy. Again, the mining equipment is costly. The best way to mine successfully is through the use of ASIC miners, with the implication of locking out beginners or people without a lot of money from mining.
Miners in most cryptocurrencies that use proof of work (PoW) protocol are paid with new coins. For example, Bitcoin rewards miners who forge new blocks with new coins this is the route used to introduce new coins into the market.
Crypto staking is another method used for confirming transactions but only for the networks that use proof of stake (PoS) consensus protocol. The proof of stake protocol was developed to address the shortcomings manifesting in the proof of work (PoW) consensus system, especially the high demand for power. Instead of requiring computers with high processing power, crypto staking requires you to have some stake to qualify to forge new blocks. Since no expensive equipment will be needed, anyone who has some crypto coins can start staking.
Another advantage of crypto staking is that it is pretty easy to set up and start earning. If you select a staking pool, it will only take a couple of minutes to get started. Next, we will demonstrate how to stake using a crypto pool.
Using a Crypto Pool for Staking
Crypto staking can be done using two main methods. The first one can be pretty complex because it requires you to set up your computer to become one of the nodes on the respective network. In addition, it also requires you to designate a high-performance computer and dedicate it to act as a node. The computer is then required to remain connected to the internet and on for the entire staking period. If this is challenging, go for the second option: staking pools.
Staking Using a Crypto Pool
In crypto staking, nodes with higher amounts of crypto coins get better chances of being randomly selected to forge the subsequent blocks. Therefore, the idea of pools is aimed at combining coins to confirm more transactions and enjoy a higher reward. Then, the rewards are later shared amongst all the stakers based on the percentage of coins they hold. Staking using a pool comes with several benefits, including the following:
- The process of staking is easy: With a good staking pool, the process of staking will be pretty easy. You only need to send your coins to the pool, and experts will handle the rest, which implies that even those without any technical expertise can still stake and enjoy returns on their investments.
- You do not need to buy specialized equipment: As we highlighted earlier, staking does not require you to have advanced equipment. Apart from a standard computer, the only other thing needed of you is a wallet to hold your coins. This wallet can be a hardware wallet or a hot wallet. To be sure of the greater security of your coins when buying and using a crypto wallet, consider visiting and using hi.com.
- The staking pools are designed and run by experts: The entire concept of cryptocurrencies, blockchain, and staking is very complex to many people. Therefore, having an expert on your side can help to increase the chances of earning more returns. A profitable staking pool is usually managed by experts; this is one of the many advantages it holds. These professionals have the experience and resources that are guaranteed to help you to optimize returns from staking.
How to Select a Good Pool/ DeFi Platform for Crypto Staking?
The decision to stake using a staking pool comes with many benefits, but how do you go about it? Here are some valuable tips to help you identify the best pool for crypto staking:
This is probably the most critical parameter when selecting a staking pool. The goal is to pick the pool or decentralized finance (DeFi) platform that can have higher chances of getting more returns. One way of determining this is by checking the pools’ hardware. A good pool should have computers with high processing capability and suitable power supply so that staking can continue throughout the selected period uninterrupted. Again, the pool should be running on dedicated servers to ensure that the internet does not tip down and reduce the returns for stakers.
2. Communication and Transparency
When stakers commit their crypto coins, the goal is to get more returns, but how do you know the returns? This is why you need to go for a platform that is committed to transparency. Take some time to read through the platform’s site to understand their commitment to stakers. You can even extend this to previous stakers who used the pool in the past. If they indicate that they felt scammed or got returns that were not commensurate with their stakes, take caution to avoid similar disappointments.
3. The Pool Fees
When you join a pool, the platform charges a fee for using its resources. Here, you should look for the pool that charges affordable rates. If the fee is very high, there is a risk of the earnings you get from the staking process getting eaten away. Most pools charge a fixed fee and 2-4% margin.
4. High Security
Maximum security is an essential factor because many crypto coins are pooled together; hackers will no doubt be attracted and try to steal them. Therefore, you should go for the pool with a relentless focus on strengthening security. Check back to see the pool management’s efforts to protect the staked coins. Are they effective? For example, is the system and communications encrypted to reduce the risk of attacks?
5. Good Customer Support
Good customer support is an indication of a reliable organization. If you are stuck trying to stake more coins or accessing personal information on the staking account, the support should be there to assist you. So, check the selected pool’s website to ensure they have multiple communication channels, from phone numbers to live chats. You might also want to test the support with a direct call to ensure it is fast and professional.
This post has looked at the staking definition, demonstrating that the process can be an excellent option for generating passive income. Unlike mining that is used by proof of work (PoW) cryptocurrencies, staking is pretty easy and eco-friendly. Staking also provides personal satisfaction from knowing that you are helping strengthen and secure the crypto network.
The most important thing to get more returns from staking is working with a good staking pool. Using the tips we have highlighted in this post, you are sure of identifying the best pools. One of the platforms you can count on is hi.com, a not-for-profit financial organization dedicated to helping ensure that financial services are available to all. Reach them today at hi.com to learn more about crypto coins, staking (become a liquidity provider now in minutes), flexible earn (depositing digital assets from 7 to 365 days), crypto loans, and other related considerations. You can never go wrong with experts.