The new-age digital currency model removes the need for relying on the stock exchange or traditional brokers. Blockchain based cryptocurrencies provide a good way for investors looking to make money and millions of people around the world are making money through crypto trading, mining operations and coin staking.
Proof of Staking Mining
Proof of staking (PoS) is a relatively new consensus-based model, which first started with Ethereum but has been implemented by a number of digital currencies now.
It creates new special blocks that are added to the blockchain. These blocks are staked by a person who is holding some coins and helps validate new transactions on the platform.
An individual is able to mine or validate new transactions for coins equal to the number of coins they have staked. The more coins a person stakes, the higher their power to validate transactions.
In a regular crypto network like Bitcoin, transactions are randomly processed by the miner who is the first to solve a complex algorithm. Investors holding Bitcoins have no say in which network operator validates the transaction.
In a Proof of Staking network, miners are chosen randomly from a pool by holders of the digital coin. A miner can join the pool by staking a certain amount of coins in a bound wallet.
The chosen node stakes the coins in the bound wallet and creates a new block that is proportional to the percentage of coins staked. For example, if the number of coins staked is 5% of the total coins on the network, the node can mine 5% of transactions for new blocks.
Benefits of Staking Coins
Staking coins offers a number of benefits to mining operators.
- The consensus mechanism removes the need for purchasing high-end computer hardware. When a mining node stakes bound coins from an e-wallet, it is guaranteed a fixed percentage of transactions on the network irrespective of its processing power.
- Investors with enough holdings in the coin can validate transactions on the network.
- The value of assets staked through PoS does not depreciate with time unlike ASIC and other mining hardware. The value of the stake can only be affected by fluctuations in the currency prices.
- Proof of stake is environmentally friendly and more energy efficient than proof of work mining used in Bitcoin.
- The threat of 51% attacks is reduced in a staking coins system.
The major benefit of staking coins is that it removes the need for purchasing expensive hardware. The system offers a guaranteed return and predictable source of income for miners unlike proof of work system where coins are randomly rewarded to the most high-level computing systems.
The Risks of Staking Coins
Staking coins in a bound wallet has one problem. The coins are locked up for a period of time and cannot be sold.
This may not be a problem while the value of the currency is rising. In a falling market, this could lead to major losses for the investor. The amount earned through staking might not be enough to cover the price depreciation during a bearish run.