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Staking is a passive income with cryptocurrency.

What is staking?

Staking is the process of storing cryptocurrency assets on a wallet to ensure the operation of the blockchain.  Its essence lies in keeping the validators of a certain number of coins in their wallet. Thus, they can, on the one hand, participate in the generation of new blocks of the network, and, on the other hand, receive passive income in the form of a reward. This system is similar to bank deposits or a loan system.

Proof-of-Stake Algorithm

Staking is used within blockchains which use the Proof-of-Stake consensus algorithm. Unlike the Proof-of-Work algorithm, in which new blocks of the network are confirmed through mining, Proof-of-Stake uses staking for all operations on the blockchain. The main advantage of this system is that it doesn’t require specialized and very expensive ASIC equipment.

The first version of Proof-of-Stake was Delegated Proof of Stake (DPoS). Within this system, stakeholders vote to elect several delegates to support the operation of the blockchain. The more assets are fixed on the user’s wallet, the more power his voice has. In addition, stakeholders can provide some of their coins to other users and receive a reward for this, similar to bank loans.

To make the selection of nodes for block validation more honest and not subject it to various manipulations by the richest holders, there are several techniques introduced into the process. They make it as random as possible. For example, there is a method that chooses the oldest coins in a steak.

PoS benefits

Safety. Since participating in staking requests a fairly large share of coins on the account, an attempted fraud can result in huge losses for the holder. After all, if a node is caught trying to commit an unauthorized action, it will lose all of its share.

Decentralization. A sufficiently large number of validating nodes reduces the likelihood of network control by strong players.

Reduced volatility. It is the commission that is used as a reward for confirming transactions. Not the generation of new coins, as in mining. This principle stabilizes the cryptocurrency rate.

Lower costs. Mining requires not just expensive equipment, but also huge power that consumes thousands of watts of electricity, while a regular laptop will be enough for staking.

Cold staking

There is also a cold staking. It’s a staking without an Internet connection. It is produced using crypto hardware wallets that are known for their security and reliability. Thus, the stakeholder can participate in the confirmation of transactions. However, if he withdraws his assets from the hardware wallet, then he automatically stops taking part in staking.

How to make money with staking?

Firstly, you need to create your own crypto wallet and replenish it with a certain amount of coins, the blockchain of which is based on the PoS algorithm.  The funds will need to be frozen using a special deposit smart contract and not used for a long time.  Then you need to install the necessary software and wait for the appearance of new network blocks. After that, you should start the work of the synchronized wallet and receive your reward after a set time.

In general, this system is very similar to deposit accounts in banks: you invest a certain amount of money and after a while you get your income. The advantage of staking is to provide passive income for the stakeholder, which does not require constant involvement in the process. The main risk with this type of earnings is the possible depreciation of the cryptocurrency.

Conclusion

Staking is becoming more and more popular today.  For example, Ethereum, the world’s second largest cryptocurrency by capitalization, is already introducing an update that will change the Proof-of-Work algorithm to Proof-of-Stake. Staking has various advantages and, due to its simplicity, is attractive as a way of earning money.

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