The crypto space has developed so much that more and more investors are showing a high interest in the amazing technology behind this industries.
This technology called blockchain, although at its core it has a complex structure, has managed to bring in the present extraordinary investment opportunities for all people who have access to the Internet, without limitations imposed by the Government or banks.
One such application of blockchain is staking, which in addition to personal financial benefits, holds a much more important role. Staking is the keysto the operation of the entire crypto space and the only one meant to survive.
- What is staking?
To better understand what staking is, pay attention to the following comparison. You have some funds that you want to invest. You are looking for a profitable, simple and low-risk investment, what could it be? Surely you have thought about opening a savings account with the bank, that is, you deposit your fiat money in exchange for a small interest rate, thus giving the bank control over the deposit of your funds.
Inote that instead of fiat money there are cryptocurrencies, and instead of banks sunt DEXs (decentralized exchanges) or CEXs (centralized exchanges), which through blockchain stores your cryptocurrencies in a vault, created with the help of cryptography. Howdo you know what staking is!
To do staking, just connect your crypto wallet to DEX/CEX and select your desired cryptocurrency from the section dedicated to staking. Also, thanks to the advance of crypto technology, there is the possibility of staking directly in your hardware crypto wallet (cold wallet). Thus, your cryptocurrencies are in maximum safety, simultaneously producing your passive income
But why would you choose staking?
- Advantages of staking
- Interest rate(interest)
The biggest advantage is the reward you receive. The interst rate for low-risk staking of most cryptocurrencies exceeds, on average, 7.65%, sometimes reaching over 18% or more depending on the level of risk you can manage when choosing a particular cryptocurrency, compared to an interest rate below 2.6 % prhymed from banks.
- Protection from inflation
Cryptocurrencies are stored on the blockchain, which means that if a limited number of coins were created by code and cryptography, it can no longer be modified. Each cryptocurrency has a program, that is, a certain percentage of the total number of cryptocurrencies enter into circulation periodically, causing their price to rise. This is where the character of cryptocurrencies to be deflation comes from. However, fiat money is subject to inflation, which means that over time it loses its value. In this case, you as an investor, will end up having an increasingly lower interest rate of your investment, although it apparently has the same value.
- Accessibility
Saving of course involves opening an account with the bank and certain criteria met and verified. However, if you choose staking on DEXes or CEXes, you only need internet access, no matter where you are located. There is generally no limit to the volume invested or an administrator in control of your funds. The staking process is automated and secure by computer and code, free of natural and frequent human error.
- Staking functionalities
Staking has 2 great functionalities. , the one previously debated, is to generate interest on a certain number of cryptocurrencies. The higher your investment, the more satisfying the reward. Doing staking, you still own the crypto-coins, except that they are blocked and cannot be used in certain actions (e.g. selling lending) until you decide to end the action. At the end of the staking period, you will get your cryptocurrencies back, plus the interest produced during that time.
The second functionality of staking, and of course the one that has revolutionized the entire industry at its emergence, is to ensure the stability ofof the blockchain.
What does this mean? Do not worry, although it is an important and complex concept, you will understand it in a few lines, below.
Staking corresponds to Proof-of-Stake protocols. Blockchain networks that use this method are secured and kept in operation by so-called validators, who are rewarded with cryptocurrencies for their work However, validators must meet clear requirements. They need the appropriate hardware and software equipment to connect to the desired blockchain network. Fortunately, they are quite affordable for any individual eager to become validator. The more complicated part, however, is the one in which the staking intervenes. To complete the process of becoming a , a certain amount of cryptocurrencies must be put to staking. Cryptocurrencies will be the native tokens of the chosen blockchain. With the increase in popularity and price of cryptocurrencies, the quantity has become increasing or increasingly expensive. For this reason, the process of becoming a validator is not an easy one. However, this is a positive thing, because those who are really confident in that blockchain network and who are of high interest for him, they will become validators. Their aim will be to improve and protect both the blockchain and consumers, which demonstrates the sustainability of the PoS type.
- Risks in staking
- Smart contracts risk
Because any blockchain application is built with the help of code, more precisely smart contracts, there will always be the possibility of a problem in the code. But, the strongest blockchain networks have already proven their strength, and this risk is specific, more often, to new projects.
- Take-over possibility
The entire crypto domain and implicitly blockchain were created with the main purpose of eliminating the middleman in activities and transactions, focusing on creating a decentralized system. Since staking involves owning a large amount of cryptocurrencies to become a , it is obvious that those with more resources, can end up taking control on the blockchain network, thus endangering the safety of users and their funds.
- Centralizing
Some of the protocols impose a limited number of validators, which poses a risk to the safety of the blockchain and brings to the fore the issue of centralization.
Staking has a double role, solving 2 problems simultaneously.
On the one hand, it helps to strengthen the crypto system by offering sustainability to anyone who runs the network blockchain based on a Proof-of-Stake protocol. A PoS protocol uses a small amount of energy to function, which perfectly aligns with the need to protect the environment and its resources .
On the other hand, the financial benefits are satisfactory for users, who do not have the benefit of imposing absurd conditions. Authority is in code, not in the hands of the people who are subject to the manifold.
The most well-known blockchains based on a PoS protocol are Ethereum, Cosmos, Tezos, Cardano,
Staking is therefore the best investment method for beginners, as stakers and for specialists or hobbyists, as validators to produce passive income.
Disclaimer: This is not financial advise, just educative purpose only.
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