EThe process of staking consists acquire cryptocurrencies and keep them locked in a wallet in order to receive profit or rewards. It is a process very similar to HODL, only that in stake the balances are locked and you cannot use them freely. At the same time that contributes to the operability and operation of the blockchain of that same cryptocurrency.
As we well know, the blockchain is the technology that gave life to cryptocurrencies. And each cryptocurrency has its own blockchain to keep its records of the transactions carried out. But although they are different blockchains, they all have a relationship in common: transactions must be validated by consensus.
For this, each blockchain adopts a consensus protocol, such as Bitcoin, that uses the Proof of Work (PoW) for block mining. A process that demands great computing power and therefore consumes a lot of electricity. But other cryptocurrencies, like NEO, Stellar, Algorand (and very soon Ethereum) use another mechanism, known as PParticipation or Proof of Stake (PoS).
In this protocol, stored cryptocurrencies are used as a way to verify transactions within the blockchains. So the staking It is a process particularly adopted in blockchains that operate with Proof of Stake (PoS), or some of its variations.
How does Staking work?
In the PoS consensus protocol the nodes are known as validators. And they are the ones in charge, as their name implies, of validating the generated blocks.
The choice of these validator nodes is a process that occurs randomly, very similar to that of a lottery. Although they have a greater probability of being chosen, those nodes that have more cryptocurrencies. As we already mentioned, in PoS, block validation does not occur through mining, but is performed by those nodes that have cryptocurrencies in their possession. So the PoS is based on staking. Encouraging users to keep their funds in a wallet to contribute to the support of the network and make profits from it.
So, to perform staking, all you have to do is acquire a cryptocurrency that allows you to do this process, and use the official wallet to stake. Thus, just by keeping those cryptocurrencies stored, you can obtain rewards from the network. Very similar to having a savings account and receiving interest on your funds.
They are groups of users who come together to increase their possibilities as block validators. So they unify all their funds to have greater staking power. Then, when they receive the rewards, they divide them among all the participants equivalent to the individual contribution that each one made.
This method allows small users or new users to participate in the network regardless of the amount of assets they own. Contributing to the decentralization of it.
It is about staking from a cold wallet. Like a hardware wallet that has no permanent Internet connection. Some blockchains allow this type of staking, helping their users to keep their funds offline, and therefore much more secure.
It is ideal for those users who possess large amounts of cryptocurrencies. That without a doubt being online, they would be at great risk.
This modality allows many to offer a dedicated service to coin users to stake. However, the returnability with this type of staking depends a lot on the commissions that they charge. They can range from 2% to 50% of rewards. So they would contribute a lower percentage of profits than if staking will be done only from one platform.
Staking advantages and disadvantages
The main advantage of this process is that it completely eliminates the need to acquire or invest in specialized mining hardware or equipment. And with it, the energy requirement that they demand. In addition, the generation of blocks through staking allows greater scalability of the network.
On the other hand, for users, keeping a large number of cryptocurrencies in stake gives them a greater probability of being chosen as validators. And thus be able to validate and verify the new blocks that are produced in the blockchain. Making better profits and much more stable than with the PoW mining process.
Likewise, cryptocurrencies that remain in stake do not devalue over time. As can happen with mining equipment if a better and more powerful one is designed.
The process of buying cryptocurrencies and keeping them tucked away for rewards can be quite eye-catching. But the truth is that you cannot expect very significant gains. The platforms and exchanges pay very low annual percentages, so the rewards are very low compared to those obtained from mining blocks.
Also, keeping cryptocurrencies stored in an online wallet can pose your risks. Since a hacker could extract all your funds. In the same way, using a platform or exchange is putting your trust and funds in the hands of a third party.
As for the possession of coins, it is a factor that undermines the decentralization by which cryptocurrencies were created. Since the greater the number of assets, the greater the probability of generating blocks and making decisions. So power can be concentrated in the hands of a few. Leaving aside the most disadvantaged.