Why You Should Stop Holding And Start Staking
To date, crypto investors all over the world have held on to their crypto assets for longer periods of time in order to mitigate short-term volatility risks and benefit from substantial returns. But what if there was a way to keep holding cryptocurrencies for the same period of time and still generate passive income from them without having to trade them or undertake any kind of risks?
Enter Staking
Staking cryptocurrency is similar to depositing money in a bank in that an investor locks up their assets and gets incentives, or "interest." in exchange. Crypto staking is a way to contribute to a blockchain network's consensus mechanism by "locking up" some of your cryptocurrency for a certain amount of time. In return, those who stake earn rewards, which usually come in the form of more coins or tokens.
Before we get into why staking is a slightly better way to invest in the cryptomarkets over simply holding, let's get to know staking a bit better.
Staking is only feasible through the proof-of-stake consensus mechanism, which is a method used by some blockchains to select honest participants and validate new blocks of data uploaded to the network.
By requiring these network users – known as validators or "stakers" – to buy and lock a fixed quantity of tokens, it makes it unappealing for these validators to act dishonestly in the network. If the blockchain was manipulated, the native token's price would certainly collapse, and the perpetrator(s) would lose money.
The stake is, therefore, the validator's "skin in the game" to guarantee they act honestly and in the best interests of the network. In return for their dedication, validators get rewards in the native cryptocurrency. The more they have at stake, the more likely they are to come up with a new block and then get the rewards. Simply said, the more at stake you have, the more likely you are to play by the rules, in addition to enjoying regular incentives.
The stake doesn't have to be just one person's coins. To encourage more people to engage in staking, validators often operate a staking pool and gather funds from a group of token holders via delegation (acting on behalf of others). Every holder can participate in staking by delegating their coins to stake pool operators who validate blockchain transactions.
To keep validators in check, they can be penalized for minor errors, like going offline for lengthy stretches of time or even kicked out of the consensus process and have their funds removed. This is called "slashing," and it has happened on a few blockchains, such as Polkadot and Ethereum, but it is quite rare.
By now, you might be wondering why you would choose this over good old holding. The answer is 'Proof of Stake.'
The shift toward POS
If you are slightly familiar with the concept of mining, staking is basically mining without all the energy-hungry hardware. The validators are the minors; they receive crypto incentives. Meanwhile, stakers help by locking in their funds, and both parties share the block rewards.
In other words, rather than exchanging electricity for cryptocurrencies, the PoS method seeks to tackle the heavy energy demand by basically substituting staking for computational power, with the network determining an individual's mining capability. This means that energy usage should be drastically reduced because miners can no longer rely on vast farms of single-purpose equipment to get an edge.
So, is Proof-of-Stake the key to scaling cryptocurrencies and revolutionizing how we perceive money? Yes. All signs point to the rising need for a scalable, secure, and efficient crypto infrastructure, which Proof-of-Stake provides. Ethereum, the second-largest blockchain network, is already on its way toward switching to the proof of stake consensus mechanism.
Proof-of-Stake cryptocurrencies would allow for faster transactions, thus encouraging more companies to accept cryptocurrency payments. So, yeah, you might be able to buy coffee with cryptocurrency!
More crucially, staking will expand access to blockchain networks and accelerate broad adoption. Even institutional investors may be motivated to buy cryptocurrency now that it has long-term viability and improved possibilities of mainstream adoption.
This is also why staking is currently a better alternative to simply holding your cryptocurrencies.
Closing note
Several POS-based chains have emerged in recent years, each with its own incentives. However, it is critical to note that staking is not a completely risk-free process, and no investment must be made without doing thorough research. Ultimately, this is all a part of a relatively new industry, and every move must be made carefully.
Nonetheless, staking is a great way to make holding much more profitable for both newcomers and professionals alike, in a less risky way. More so because the industry has touted it to be the future.