So, you have been traversing the crypto space, followed some based Twitter accounts and came across this thing called crypto staking? Let’s talk about it.
What is crypto staking?
Crypto staking is the process of temporarily combining your crypto assets within a larger pool to build upon a blockchain. Crypto staking is a way of verifying decentralised cryptocurrency transactions without the need of a middleman (such as banks). In other words, it checks that all our ducks are in line and that everything is good. Through staking, different projects offer different rewards (such as interest) which incentivise commitment to the blockchain technology.
Why is crypto staking important?
Due to the decentralised nature of cryptocurrency, verifying transactional records is not an easy task to accomplish. What stops a malicious attack on a blockchain from adding an additional block saying that 50BTC is to be transferred to be a specified account? A consensus mechanism, such as crypto staking (also known as Proof of Stake) is one way of resolving this problem. A consensus mechanism is the way blockchain systems achieve agreement and coherency across decentralised data. It ensures that no matter how big and dispersed the network is, there is still a clear picture of how all the dots connect. By crypto staking, staked tokens act as a guarantee for legitimising new transactions on the blockchain. Tokens are verified against validators chosen by the network, based on the stake size and duration of ownership. The role of the validator is to be the benchmark point of reference for the blockchain and what new tokens are evaluated against. In other words, there is a community-based monitoring system that ensures that the blockchain and all tokens interacting with it are legitimate. If tokens are found to be invalid, they are burnt (also known as a slashing event).
Pros and Cons
- Instead of having your crypto assets passively sitting in your wallets and collecting dust, staking them is a way to put them to work. By staking, you are contributing to the network security and efficiency of cryptocurrencies. This is done by not only strengthening the blockchain’s ability to process transactions but also by making them more resilient to malicious attacks.
- Through staking, owners receive an award for contributing to the blockchain protocol. This reward is typically in the form of additional tokens.
- Some projects provide governance tokens to staking participants. These tokens give the holder a say in future changes and upgrades to the protocol. Governance tokens are a digital token for democratic decision making in crypto spaces, and are essential for DAO’s.
- Compared to other means of contributing to cryptocurrency technology (such as mining), crypto staking requires no equipment and is much more environmentally friendly.
- Some protocols require staked assets to be “locked up” for a period of time. During this time, you cannot transfer, trade or sell these assets. This is similar to traditional term deposits with banks, where you agree to have a specified amount of money frozen for an agreed length of time, in return for a guaranteed interest rate.
- Crypto staking has been used as a mechanic by some projects to perpetuate hype and incentivise HODLing. HODLing (link to #58 in 70 phrases article) is a tactic to never liquidate crypto assets because one believes no matter what happens, the value of the asset will continue to rise. Market mechanics are multifactored and variable, and adopting a strict HODLing approach may not always lead to the desired MOONing of projects. A recent example of HODLing gone wrong is with LUNA becoming “effectively worthless” after dropping 99.99% of value in 24 hours.
- The volatility of crypto prices means you may suffer a loss from a large drop in value which cannot be covered by the interest gained from staking.
- Depending on the projects, unstaking your assets may take seven days or longer.
Crypto staking is a means of securing, verifying and building upon blockchains by (temporarily) contributing your crypto assets to a larger pool. By promoting blockchain protocol, projects reward stakers with rewards. Staking does come with its own inherent risks, as discussed above. However, it remains a great way to build upon an already strong portfolio, based on thorough research.
As always, it is important to DOYR. AUS.NFT is here to guide you on your journeys through the NFT and Cryptocurrency space. The fact that you are reading this article means you are already on the right path.