Crypto staking involves locking up one’s cryptocurrency holdings to earn interest or rewards. Technically, “staking” is how certain blockchain networks verify transactions.
From an investor’s perspective, staking cryptocurrency is a way of growing one’s crypto holdings without needing to buy more. Staking crypto for maximum passive income is a legitimate way of earning yields through one’s existing crypto holdings. Investors who participate in staking enjoy interest that is greater than what is offered through a regular bank account.
If you’re interested in staking cryptocurrency but are unfamiliar with the term, let us get you up to speed. Before we go there, it’s essential to understand the concept of blockchain technology. Cryptocurrencies are built with blockchain technology. Transactions involving such cryptocurrency need to be validated before the corresponding data can be stored on the blockchain. This validation process is called staking.
Let’s break it down further.
Because blockchain networks are decentralized, there are no middlemen. This is in stark opposition to traditional financial systems that use banks, for example, to serve as a repository of the public’s money.
As such, decentralization calls for a publicly accessible record across the network to ensure there is complete transparency and validity across all transactions. Transactions are collated into “blocks” and are submitted for inclusion into this record, which is immutable.
That’s kind of the greatest security feature of blockchains, by the way. Since everything is accessible and verifiable through a distributed public ledger (the record), it’s very hard to trick or hack.
That being said, once these blocks are accepted, users who own these blocks get a transaction fee as payment in the form of cryptocurrency.
What does staking have to do with all of this? you might ask. Simply put, staking is a safeguard against errors and fraud that may happen during the process.
Every time a user proposes a new block or votes to accept a proposed block, they place some of their cryptocurrency on the line. This process incentivizes adhering to the rules. So, in principle, the more crypto a user puts at stake, the higher the chances of earning transaction fee rewards.
However, if a user’s proposed block is found to have fraudulent or inaccurate data, they can lose what they put up as a stake. This process is called ‘slashing.’