Cryptocurrency has revolutionized the financial landscape, introducing new concepts and technologies that go beyond traditional banking systems. One such innovative feature is “staking,” a process that allows cryptocurrency holders to actively participate in network operations and earn passive income in return.

What is Staking?

Staking is a mechanism employed by many blockchain networks to secure and validate transactions on the network. Unlike traditional Proof-of-Work (PoW) consensus algorithms, which rely on miners solving complex mathematical puzzles to validate transactions, Proof-of-Stake (PoS) and other staking-based systems use a different approach.In a staking system, validators (participants who lock up a certain amount of cryptocurrency as collateral) are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they have staked. Essentially, the more coins a participant holds and locks up in the network, the higher the chances they have of being chosen to validate transactions.

How Staking Works:

Acquiring Cryptocurrency:

To participate in staking, individuals must first acquire the specific cryptocurrency used by the blockchain employing a staking mechanism. Popular staking coins include Tezos (XTZ), Cardano (ADA), and Polkadot (DOT).

Setting Up a Wallet:

Staked cryptocurrencies are typically stored in a specific staking wallet. Users need to set up a wallet compatible with the chosen cryptocurrency and transfer their holdings to this wallet.

Locking up Cryptocurrency:

Participants lock up a certain amount of their cryptocurrency as collateral to become eligible for staking rewards. This process is known as “staking” or “bonding.” The locked-up coins act as a guarantee that the validator will act honestly, as they have something to lose.

Validation and Block Creation:

Validators are selected to create new blocks and validate transactions based on the amount of cryptocurrency they have staked. The more coins staked, the higher the chances of being chosen. Validators are rewarded with additional cryptocurrency for their efforts.

Earning Staking Rewards:

Validators and, in some cases, delegators (users who delegate their coins to validators) receive staking rewards for their participation. These rewards are typically a percentage of the transaction fees or newly minted coins, distributed among the participants.

(You can now subscribe to our ETMarkets WhatsApp channel)

(What’s moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

Download The Economic Times News App to get Daily Market Updates & Live Business News.

Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price


Source link