To invest in cryptocurrencies, we usually think of mining or buying and selling digital assets. However, there is yet another way to do it. So-called staking in the digital currency universe is an alternative to making your crypto assets pay off over time. Moreover, it is another economic tool for protection against inflation and currency devaluation.
What is staking in the world of cryptocurrencies?
Technically speaking, staking is related to the “proof of stake” model in blockchain networks. This is how many cryptocurrencies verify their transactions and allow investors to earn rewards for their holdings. Therefore, only digital currencies that use this model can be used for this purpose. Some examples are Ether (ETH), Cardano (ADA) and Solana (SOL).
Unlike digital asset mining, which involves donating the processing power of machines and computers, staking “commits” your assets to backing a blockchain network. With this, the holder of the applied cryptocurrencies is rewarded with an interest rate.
For the investor, staking is a way to generate passive income rather than keeping their crypto assets in a digital wallet. Some currencies, for example, offer high interest rates to investors who choose to stake.
How Cryptocurrency Staking Works
Coinbase, the largest cryptocurrency exchange in the United States, explains in an article that with cryptocurrencies that use the proof-of-stake model, staking is how new transactions are added to the blockchain. It’s like mining networks that use the proof-of-work model.
In practice, cryptocurrency staking is how the blockchain protocol chooses participants to validate blocks of transaction data. So the more coins you allocate to this model, the more likely you are to receive rewards as new coins are created.
Each time a block is added to the blockchain, new cryptocurrencies are created and distributed as rewards to staking participants on that network. In most cases, the rewards come in the form of the same asset that the investor applied. However, some blockchains use a different type of cryptocurrency for rewards.
If you want to bet, you must own a cryptocurrency based on the proof-of-stake model. Then you can choose the amount you want to apply, which is also possible by exchanging against other popular digital currencies (cryptocurrency exchange).
The invested coins are always yours. While some networks and staking models require a minimum investment time, others allow immediate withdrawals. In any case, the holder of the assets is free to withdraw them and exchange them for traditional money or other cryptocurrencies.
Staking is a hedge against devaluation and inflation
The staking model in cryptocurrencies is the best way to keep a store of value in this alternative and decentralized market. “Drawing an analogy with a bank, time is an important factor in the store of value. With 1,000 US dollars today, you buy things that in a while you won’t be able to buy anymore due to inflation, currency devaluation, etc.
In the face of unstable economic times, cryptocurrency staking is another alternative to storing value. However, the investor should always be aware of the volatility of cryptocurrencies and take it into consideration before making such a request.