Like every asset, the main reason for the increase in investments in cryptocurrency is the fact that it promises huge returns when invested properly. This is a volatile industry that has a lot of investment options.
Novice traders generally treat cryptocurrencies as stocks of a company, they invest in them hoping to sell them in the future for a higher price. While advanced traders generate an extra income through staking.
What is Staking?
Generally, blockchains follow one of the 2 methods to add a block of transactions to their network.
- Proof of Work (POW)
- Proof of stake (POS)
Cryptocurrencies like Bitcoin, Ethereum follow the Proof of Work principle to validate the transaction, but it results in the expenditure of lots of energy and hence is not environmentally friendly. Proof of Stake on the other hand randomly allocates a node to verify transactions and add to the blockchain. Some cryptocurrencies like Cardano and even Ethereum with their new upcoming update work on the Proof of Stake principle. It is more environmentally friendly and faster when compared to Proof of Work.
How Does POS work?
In POS, we hold and stake our cryptocurrencies on the blockchain. This acts as proof of us being a legitimate part of that particular blockchain network. Whenever there is a transaction that needs to be verified, the blockchain allocates a particular node to verify that transaction in POS. Where in POW, the nodes have to compete against each other to verify the transactions before everyone else.
After the node verifies this transaction, the blockchain network rewards the node with some rewards which are mostly in the form of cryptocurrencies. This hence generates good passive income for the investors.
Is Staking Safe?
Yes, it is safe. When we stake our cryptocurrency investments in a pool of stakes, it’s not like we are losing our authority over them. You can take out your investments and liquidate if your pool does not have a lock-in period. In staking, we are just lending our cryptocurrencies and receiving rent in the form of rewards. Some of the popular staking pools are Coinbase, Binance, Mbox, etc.