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What is Staking? Staking Guide for Beginners

lnhngn 17/11/2021 12:28 1,014 views

What is Staking? That is the question of many investors buying and selling Bitcoin and cryptocurrencies. Staking is a rather strange concept for new investors. So, to understand in detail about this form, please follow the article below.

What is Staking?

Staking is simply understood as locking cryptocurrencies to receive rewards.

In many cases you can accumulate your coins directly from e-wallets, such as Trust Wallet. Simply put, Staking is to lock cryptocurrencies to receive rewards. Currently, many exchanges also provide staking services for users to use. Binance exchange allows users to earn rewards in a pretty easy way and all you do is keep your coins on the exchange.

So, to better understand what Staking is, first you need to learn how the PoS (Proof of Stake) mechanism works and how Staking works.

1.1 What is Proof of Stake (PoS)?

PoS is the consensus mechanism of the Blockchain that allows nodes to stake coins to work on the Block or in other words to stake coins to confirm identity. Find out more about the origin of Proof of Stake.

If you know Bitcoin well, it is probably not far from Proof of Work (PoW) – this is the mechanism that allows transactions to be aggregated into blocks. Then, these blocks link together to form a blockchain, or in other words, miners have to compete with each other for the right to add the next block and the blockchain.

PoW is proven to be a powerful mechanism to facilitate consensus reaching in a decentralized manner. PoW covers a lot of random calculations and puzzles where miners are competing to find solutions. This is also why it makes sense to use so much computation to keep the network secure. However, many people also ask if there is a way to maintain decentralized consensus without spending a lot of money?

To answer the above question is the birth of Proof of Stake, the idea is that participants can lock coins for a specific period of time and will randomly assign rights to one of them. that person to validate subsequent blocks. The probability of being selected is normally proportional to the number of coins because the more coins locked, the higher the chance of being selected.

This is exactly the same as improved PoW, and deciding which participants create a block is not based on their ability to solve hash challenges. Instead, the outcome is decided based on the amount of coins accumulated in it.

Some also point out the advantage of generating blocks via staking which allows for higher scalability for blockchains. This is also the reason why the Ethereum network plans to switch from PoW to PoS in a set of software upgrades collectively known as ETH 2.0.

1.2 Who created the Proof of Stake?

It is widely reported that Sunny King and Scott Nadal are the creators of Proof of Stake in 2012 from the Peercoin network. They model this mechanism as a peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin.

The Peercoin network offers a PoW/PoS hybrid mechanism but PoW is mainly used to generate the initial cryptocurrency and it is not necessary to maintain the long term sustainability of the network so the importance of PoW also diminishes. In fact, most of the network’s security now relies on PoS.

1.3 What is a Proof of Stake (DPoS)?

Proof-of-stake DPoS is an alternative version of the PoS mechanism developed in 2014 by Daniel Larimer. DPoS was first used as part of the BitShares blockchain and has since been adopted by other networks including EOS and Steem.

DPoS allows users to state the balance of their coins in the form of votes, and voting rights are proportional to the number of coins held. These votes are used to elect a number of delegates to represent the management of the blockchain to help ensure security and consensus.

After the delegates are elected they will receive staking rewards and those people will divide the rewards according to their respective individual contribution proportions to their voters.

The DPoS model tends to enhance network performance, allowing consensus to be reached with a smaller number of nodes. In addition, DPoS also confirms a lower degree of decentralization since the network depends on a small group of selected nodes. The role of these nodes is to handle the operation and overall network administration of the blockchain. From there, the node participates in important processes to reach consensus and determine important governance parameters.

Summary DPoS allows users to know their influence through other participants of the network.

2. Staking Guide for Newbies

2.1 How does staking work?

PoW blockchains mine to add new blocks to the blockchain, whereas PoS blockchains create and validate new blocks through staking. The staking process relies on validators that lock coins that can be randomly selected for a specific period of time to generate blocks. Usually, participants with a larger cumulative amount will have a higher chance of being selected as validators for the next block.

This allows blocks to be generated without relying on specialized mining hardware. While ASIC mining requires a significant investment in hardware, staking requires a direct investment in the cryptocurrency itself. Therefore, instead of competing for the next block with computational work, the PoS validator is chosen based on the number of coins staked.

Stake incentivizes those whose coins are being held to maintain network security. However, if the execution fails, their entire stake may be at risk.

In our country Staking works simply to keep money in a suitable wallet and basically allows every participant to perform various network functions in exchange for staking rewards. This action also includes depositing funds into a staking pool, which will be covered in more detail later.

How are staking rewards calculated?

Staking rewards do not have a specific calculation, but each blockchain network can use different reward calculation methods.

Some calculations will be adjusted on a block-by-block basis and depend on various factors such as

  • How many coins is the validator accumulating?
  • How long does the validator accumulate?
  • How many coins are accumulated on the network in total?
  • Inflation rate
  • Other factors
  • Staking rewards are also determined with a fixed percentage for some other networks. These rewards are distributed as a form of inflation compensation to incentivize people to use their coins instead of holding them. This approach helps to increase the use of cryptocurrencies of these coins. A reward schedule will be predicted and it incentivizes users to participate in staking.

Hopefully, the information the article has just shared will help investors understand specific information related to Staking.

2.2 What is a staking pool?

A staking pool is a group of coin holders to consolidate resources in order to increase the chances of validating blocks and receiving rewards. From there they combine the power of staking and share to the contributors to the group the corresponding rewards.

Setting up and maintaining a staking pool requires a lot of time and expertise. On networks with technical or financial barriers to entry, staking pools tend to be relatively efficient. This is also the reason many pool providers charge a fee on staking rewards to participants.

Pools can also provide additional flexibility for individual accumulators, and typically stakes must be locked for a certain amount of time, and often have a withdrawal period, there must be an unlink time set by the exchange. awake. However, you must make sure that there is a sufficient balance to accumulate without any bad actions.

So, staking pools all require a minimum balance and don’t care about withdrawal time. It is therefore ideal for new users to join virtual currencies as the staking pool does not require a single accumulation.

2.3 What is cold staking?

Cold Staking is the process of staking on wallets that are not connected to the internet, done using hardware or air-gapped software wallets. Networks that support Cold Staking work in offline mode, allowing users to keep their coins safe. However, if depositors move funds out of their wallets, they will stop receiving rewards. This form is especially advantageous for participants who make large deposits and want to maximize their funds while still being supported by the network.

2.4 Risks when participating in Staking

Any form of investment is profitable but comes with certain risks, including Staking.

First, during the time of participating in Staking, the amount of Stake coins will be locked and you will not be able to buy, sell or trade with this amount of coins. If unstaking will make you not receive rewards and it will also take a while to get back the amount of coins that have been staked, maybe when you receive that amount of coins, your investment opportunities will be over.

In particular, participating in Staking is not always profitable, but the biggest risk investors face is the price of the coin down, so the risk is unavoidable depending on the coin market at that time.

2.5 Parameters to pay attention to when Staking

For effective staking to achieve high profits, it is necessary to pay attention to the following parameters.

  • Inflation occurs when the percentage of new coins born is larger or smaller than the amount of coins currently in circulation. In Staking, the PoS mechanism generates rewards for investors from two sources, the newly born blockchain and transaction fees. Therefore, the number of newly born coins will be invested in the market and inflation will occur. Therefore, the rate of inflation directly affects the level of circulation and the price of the coin at that time. For coins with PoS mechanism, inflation rate often occurs.
  • Lock time: This time you can choose from the beginning because often projects will let you choose from the beginning depending on the participants. This is the time that the coin is locked and after this time you will get back the amount of coins you have staked. For Nodes or Master Nodes, they usually determine the lock during the time of being a node when participating in Stake and during that time they receive a reward as a source of income.
  • Unlock time: Most people can press unlock after the end of the staking process, but the amount of coins participating in staking will be received after a certain period of time. There are some projects that create rules so that the action of unstaking does not affect the normal operation of the network and also has a processing time if the amount of coins is too large.
  • Interest rate: In the Staking process, the interest rate is a parameter that all participants are interested in after a period of investment. The larger the profit, the larger the amount of coins received after Stake. Optimizing Staking is not simply concerned with high interest but also depends on other indicators.
  • Minimum number of coins to participate in staking: Depending on each project, the minimum number of coins required by a user when participating in staking is also different.
  • Coin age: This is the amount of time the coin starts to be profitable from the time of putting the coin on the stake to the time of participating in the official staking. However, depending on the nature of each project, this time may be early or late.
  • Weight :Weight includes the coin age and the number of coins which can be simply understood as the weight of the coin. The larger the amount of coins and the longer the time the coin participates in staking, the higher the Weight value and the greater the possibility of winning the right to process the transaction and create the next block. Weight directly affects the reward that the participant will receive in the future.

Above the article has just shared specific information about staking form, hoping this would help investors have the right view and get the highest profit in the future.


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lnhngn

"Don't invest in what you don't know. Learn first then invest"