Understanding Staking and Generating Passive Income in the World of Cryptocurrency
The recent trend of the cryptocurrency market seems to be on a replay: the prices of cryptocurrencies go up in a minute and in another hour, declines faster than it rose. In recent times, individuals have made digital currencies, an alternative or additional source of income.
Initially, in order to make money through cryptocurrency, a trader or investor was required to either trade (buy and sell) using Cryptocurrencies or mine them. However, the recent state of the market has made traders and investors seek new ways through which they can make a profit through cryptocurrency.
A recent development/way which allows traders and investors profit from digital currencies is cryptocurrency staking. Regardless of the current market highs and lows, cryptocurrency staking is a way of generating passive income to holders of coins.
Cryptocurrency staking was first introduced in the year 2012 by Sunny King and Scott Nadal in a whitepaper introducing the peer-to-peer cryptocurrency, Peercoin (PPC), as a form of reward for the Proof of Stake Consensus algorithm. Since then, several other cryptocurrencies have implemented the Proof of Stake algorithm into their system as a method of transaction verification.
Cryptocurrency staking, coined from the term “Proof of Stake (POS)”, is a consensus algorithm which creates new blocks which are added to the blockchain.
These newly generated blocks are staked by a person who is already holding some coins and helps in validating a new transaction on the platform where the blocks were generated. An individual can only validate transactions based on their staked number of coins.
Crypto staking can be described as holding interest over some amount of money fixed in your bank account. In this case, the coins are locked in a wallet for a period of time and as a reward, more coins are added to the wallet. The more a person stakes their coins, the additional coins they get. This is similar to a person acquiring money interest from their bank through their fixed deposit accounts. Sounds good, right?
Generally, Proof of Stake works differently from Proof of Work. Proof of work is a requirement which must be met in order to ensure that new sets of transactions are validated on the Blockchain.
It involves solving several complex mathematical computations during which transactions are validated while new blocks are formed. The reward of validating the transactions are in coins, this is referred to as mining. However, in Proof of Stake, the transactions are validated using a different kind of algorithm. Rather than solve complex mathematical problems in order to validate transactions, the creator of a new block is chosen in a deterministic way.
The forgers of the new block are usually the owners. Attached to each staking process is a reward rate which may vary from cryptocurrency to cryptocurrency.
Why You Should Stake Your Coins.
- The system of cryptocurrency staking provides an alternative and easier source of income for miners.
- The need for expensive mining equipment which consumes huge amounts of electricity for the purpose of mining coins is eliminated.
- The value of your holdings staked does not increase or decrease with time unlike ASIC and other mining equipment.
- Staking of coins reduces the 51% attack commonly experienced by miners.
- The process of Cryptocurrency staking consumes less energy. This means there is less consumption of electricity and a low generation of heat experienced during the process of staking.
The Disadvantages of Cryptocurrency Staking
- Although the value of the staked coins cannot be affected or depreciated by the factor of time, the trend of the market can affect the value. This means that as the prices of cryptocurrencies experience a rise, the value of your staked coins rises and vice versa.
- Staked coins are locked in a wallet for a period of time. Until this time elapses, you will not be allowed to sell your staked holdings.
Crypto Staking Vs Crypto Mining?
Although both cryptocurrency staking and cryptocurrency mining are alternative sources for increasing your holdings while profiting at the same time, the two concepts work differently.
For staking of coins, the Proof of Stake (PoS) consensus algorithm is used. This works when a trader, person or investor purchase choice of cryptocurrency and stores them in a wallet for a fixed period of time. As earlier mentioned, this is similar to a fixed deposit account in a local bank. As time progresses, the amount of money in the fixed deposit increases per interest. In staking of coins, as time progresses, there is the reward of additional coins.
By holding the coins in your wallet during your desired period of time, you are rewarded for supporting the network. This implies, that you will continue to get additional coins as long as you hold them in the wallet.
To simply put, you can earn some passive income by holding as many Proof of Stake cryptocurrencies as desired. However, your staked coins cannot be sold or transferred until the estimated time of storage has elapsed. Cryptocurrency mining works differently (It employs the principle of Proof of Work). There is a need to have the hardware equipment capable of mining the coins. This is expensive, requires technical know-how, consumes large amounts of electricity (energy-consuming), and generates a low of heat (requires cooling equipment).
Subscribe to get your daily round-up of top tech stories!