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What is Staking and How Does It Work?

Do you have some crypto coins in a wallet, and have been wondering whether there is a way to rake more returns with them? Well, we have found one awesome option, crypto staking. You will like this method because it does not involve selling the crypto coins, but it creates a channel to make some passive income. This post is prepared to answer the big question, “how does crypto staking work?”

What is Crypto Staking?

Crypto staking is the process of actively participating in supporting blockchain and confirming transactions by committing your crypto coins. It entails holding (locking) your funds for some moment to ensure they work as a node in the selected blockchain. In return, you receive some rewards cut from the transaction fee paid by the network users.

Crypto staking only happens in blockchains that use proof of stake (POS) consensus protocol. Good examples of these coins include Ethereum (in the process of shifting from proof of work protocol to POS), Cardano, Solana, DASH, and NOW.

Proof of Stake (POS) Mechanism

To understand the process of staking more effectively, it is prudent to go deeper into the supporting consensus protocol, the proof of stake (POS) mechanism. Taking a closer look at Bitcoin, the pioneer blockchain, you will realize that it uses a consensus protocol referred to as proof of work (POW) that requires miners (nodes) to solve complex mathematical problems. The first to get it right grabs the chance to add the next block on the blockchain. Now, POS is the opposite of POW.

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Proof of stake (POS) is a consensus mechanism where confirmation of transactions and forging of new blocks for the blockchain under consideration is done by nodes that own some coins in the network. We must add that simply owning the coins is not enough to qualify you to participate in staking and forging new blocks. In addition, the coins must be locked to the network for some time to be able to help with consensus. This is where staking comes into play.

The more stakes you have, the higher the chances of being selected to forge the next block. There is one unique advantage of staking when compared to mining used in the proof of work (POW) blockchain networks, such as Bitcoin:  it does not require a lot of power. Therefore, it is considered an eco-friendly option. With proof of stake (POS), blockchains are also able to scale more easily. This is one of the reasons why Ethereum is migrating from proof of work (POW) to proof of stake.

How to Stake Your Crypto Coins for Passive Income

Now that you know the mechanism behind staking, it is time to get down to work. So, how exactly do you stake your POS coins? Here are the main steps:

  • Buy Your Crypto Coins

As we mentioned earlier in this post, you can only engage in staking if you have some POS coins. So, start by purchasing them. You can buy the coins directly from the crypto exchanges or even from a friend who has them. Remember that you will also need a crypto wallet to store the crypto coins that you purchase.

  • Identify a Good DeFi Platform

Although you can stake your coins directly from your crypto wallet, this method is not recommended because of a few things. For example, you need to have your computer and internet 24/7 during the entire staking period. Also, you will have limited chances of forging the next blocks because of few coins. The next best option is using a DeFi platform. This is a pool where you deposit your coins, and others add theirs too. The more the coins in the staking pool, the more the chances of confirming transactions on the blockchain network. However, the staking rewards will be divided among all the coins in the pool.

  • Receive Your Staking Rewards

Finally, you receive your staking rewards based on your agreement with the DeFi platform of choice. The rewards are calculated on an annual basis and sent to your account. If you staked the coins over a longer period, this could form a perfect stream of passive income.

If you have some coins and want to make passive income, staking will be an excellent choice. Remember that you should always look for the best decentralized finance (DeFi) platform. This is a platform comprising experts and excellent security measures to protect your coins. One platform that ticks right in all of these attributes is Mantra Dao. Visit them today to learn more about staking.

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