Is Crypto Staking the New Savings Account?
What Does Crypto Staking Mean?
Crypto staking is the process of locking up a certain amount of cryptocurrency through an exchange or a staking pool in return for passive income in the form of interest or rewards, typically paid via that cryptocurrency. The blockchain uses that staked crypto to validate additional transactions.
In some ways, crypto staking is like buying a certificate of deposit from a bank. The bank holds onto the buyer’s assets for a period of time in exchange for interest. With staking, the blockchain keeps the assets in exchange for rewards.
How Does Crypto Staking Work?
Clients who are interested in crypto staking will first need to own or purchase a cryptocurrency that uses a proof-of-stake model to confirm transactions. Ether, Cardano and Polkadot are examples of cryptocurrencies that use proof of stake.
Then, they’ll need to commit some (or all) of their holdings to the network, for use in validating transactions. The easiest way to do this is via an exchange such as Coinbase or Kraken. If the blockchain uses that crypto to validate a transaction, the owner receives a reward payment.
(Advanced crypto traders may bypass the exchange and stake their crypto directly, but that requires significant technical knowledge and time to set up and run a node.)
Proof of Stake vs. Proof of Work
Proof of stake and proof of work are two of the most common consensus mechanisms used by the blockchain to validate transactions and bring more crypto online. Proof of work, the mechanism used by Bitcoin and the original method of validating cryptocurrency, relies on virtual “miners” around the world to process complex math problems and confirm transactions. This is a time- and energy-intensive process.
Proof of stake, on the other hand, uses existing staked crypto from network participants to validate new transactions. Crypto staking is only available for cryptocurrencies that use proof-of-stake mechanisms. The Ethereum network is transitioning from proof of work to proof of stake.
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