You may have heard of the term staking on digital assets, but you may not be sure of what it actually means. Staking involves holding funds in crypto wallets to support the operations and the security of a blockchain network. Staking refers to the act of locking digital assets to receive future rewards.
Many investors are able to stake their coins directly into their crypto wallet or a Trust Wallet for instance. In other cases, crypto exchange platforms offer to stake services to their customers. For example, Binance Staking allows investors to earn their rewards just by holding their digital assets on the exchange platform.
Another familiar term related to staking is Proof-of-Work (PoW) and Proof-of-Stake (PoS). PoW is a mechanism that gathers all transactions into blocks of data and links them together to create a blockchain. Crypto miners always compete to solve complicated mathematical equations and puzzles, the first user to do so is allowed to add an extra block to the blockchain.
Proof of Work system is a robust mechanism that facilitates blockchain algorithms in decentralized manners. However, PoW involves a significant amount of capricious calculations which can be aggravating for most miners. The complex math puzzles that miners compete to solve become futile and serve no objective other than supporting the network and keeping it secure.
The question is if there is an option to maintain a decentralized consensus algorithm without the aggravating calculations?
The answer is, yes. This is where Proof of Stake or PoS comes in. The general principle behind the Proof of Stake system is to lock coins, or stakes of investors and randomly assign their rights to one of them in order to validate the next block. The process carries on at specific intervals of time. Normally, the chances of being selected are directly proportional to the number of coins locked up, implying the higher number of coins locked up, the higher will be the chances of being selected.
Proof of Stake works efficiently as compared to proof of work. Proof of Stake determines the participants by determining the number of stakes they are holding, unlike proof of work in which participants must solve complex puzzles as proof of their work.
Experts argue that producing blocks through staking will allow for a high degree of a blockchain’s scalability, or their capacity to facilitate more transactions in the network. Because of its function, the PoS network has been chosen by quite a few crypto companies such as Ethereum, which plans to migrate from the PoW system to the PoS due to its efficiency, in an upgraded version of the digital asset known as Ethereum 2.0.
PoS and staking in itself pave the way for anyone willing to participate in the governance and facilitation of blockchain consensus. It allows participants to earn passive income in a convenient manner just by holding their coins. Staking coins in a blockchain is also convenient as barrier entries to a blockchain network are decreasing nowadays.
