Reward for hodling

Before your crypto assets gather dust in your wallet, it would be much better to use them profitably. One way to do this is through staking, which offers rewards for holding. This article takes a closer look at this and provides information on the background to staking and how it works. Basically, you can think of staking as an interest-bearing time deposit account. You get a pro-rata premium for staked cryptos – depending on the coin, up to over 25 percent! In the past, a bank would lend out the deposited funds of its customers and pay interest to the savers, but the situation is similar with staking. Here, the blockchain makes use of the stake by participating in the “Proof of Stake” consensus process.

No bitcoin staking

Because cryptocurrencies are decentralised, they require a consensus process to make and verify decisions. Many cryptocurrencies, including Bitcoin and Ethereum in its current form, use Proof of Work to do this. In this consensus process, the network has to solve problems using computing power, such as validating transactions. The miners involved compete to see who can solve a complex computing problem first – the winner gets the right to add the latest “block” of verified transactions to the blockchain, which is rewarded with cryptocurrencies.

This principle leads to problems with increasing complexity. More computing power consumes more energy, which leads to higher costs and thus to decreasing attractiveness for miners. In addition, energy bottlenecks can occur, transactions are delayed and fees increase. Speed, economy and efficiency are required – a case for Prove of Stake. Here, the developers do without solving mathematical problems on the part of the miners. Instead, they rely on validators – people who have already invested in the blockchain to a sufficient extent.

The principle: A network participant is selected who adds the most recent transaction package to the blockchain and is paid in cryptocurrencies in return. Basically, users deposit their tokens and in return receive the chance to add a new block to the blockchain and earn a premium for it. The validators’ staked tokens serve as a guarantee of regularity. These people are selected depending on the size of their stakes and the period of time they have held them. Whoever has invested the most in the network thus receives a reward for it.

Light and shadow of staking

In addition to the rewards, the increase in security and efficiency of the supported blockchain projects is a key incentive for staking. The Blockchain becomes more resistant to attackers and its ability to process transactions is strengthened. But of course there are downsides to consider: Staked assets are usually subject to a lock-up or holding period, which limits flexibility given the volatility in the cryptocurrency sector. Those who are aware of these conditions and still want to participate in staking can do so in a relatively simple way, for example by using a portion of their assets for staking on Coinbase, bitpanda or another participating wallet provider. The rewards are then credited directly to the corresponding wallet. Almost like a time deposit account in the old days.

Share This Story, Choose Your Platform!