Cryptocurrency - Staking Concept

 OVERVIEW

Cryptocurrency staking is a great way for our users to earn rewards on idle lying cryptocurrencies in their wallets by simply staking them on our platform. Staking is a relatively new concept. This guide has been created to help you get a better understanding of what staking is, the technology behind it and how it could benefit you.

Before we describe what staking is and the entire rationale behind it, it is important to first get familiar with the two most common consensus mechanisms used in Blockchain Technology.

Proof of Work (PoW) and Proof of Stake (PoS)

Proof of Work and Proof of Stake are two most common consensus mechanisms which define a set of rules that govern how nodes in a given peer to peer network interact and validate transactions that will be added to the blockchain.

This consensus mechanism is a common agreement between the nodes of the network. So there is no need to trust anyone. For you to have a better understanding of Staking it will be essential to first understand the difference between the two mechanisms.

The PoW mechanism is the first consensus mechanism created and is used by many cryptocurrencies including Bitcoin, Ethereum and Monero. In a PoW mechanism, all miners compete with each other to find the next block to be placed in the blockchain. This process is called mining and the process involves solving a complex mathematical puzzle. The miner who mines the next block gets rewarded for the resources spent in doing so. For each block mined, Bitcoin miners receive 6.25 BTC per block whereas Ether miners receive 5 ETH.

While everyone participates to decode the puzzle and get the reward, the miners who have specialized hardware for mining or who collaborate with other miners to form mining pools usually end up getting more rewards. The mining process as done in the PoW mechanism requires high computational energy, infrastructure cost and aggressive competition.The PoS mechanism is the most common alternative to PoW mechanism that works in a way similar to how a company works. Each member of the company has certain shares of the company and that determines their voting rights. The more the number of shares held, the more is the voice heard. In case of PoS mechanism, the stake is defined by the digital currency operating in the blockchain. Although the block is created randomly, the proportion of blocks created by a particular stakeholder is determined by his ownership of the stake in comparison to the other stakeholders in the system. In a PoS , one node is elected to validate a particular block. This reduces the competition as well. Another difference between PoS and PoW is that in a PoS mechanism, there are no Miners or Mining. Instead, there are Validators and they either Mint or Forge. Although this mechanism is less secure than PoW, the energy consumed to provide consensus is surely very low.

Similar to mining pools, staking pools are also formed to increase their chances of validating blocks and receiving rewards. Staking systems allow delegation in which each individual delegates their voting rights to a trusted party. Those delegates then earn all the rewards for the block validation and later reward their supporters in the form of returns. Staking is one of the easiest ways of earning passive income.

Benefits of Staking -

Staking eliminates the need to purchase expensive hardware to increase the chances of winning. Since competition is less in staking, energy consumed by the entire network for adding a new block reduces significantly.

The system offers guaranteed returns and a predictable source of income, unlike the PoW system where coins are rewarded through a random process with low probability.

PoS is considered to be safer than PoW as it reduces the chances of a 51% attack. Even when someone owns 51% stake in the network, they would not want to attack the network as this would decrease the value of their tokens as well.

Staking as an Investment Option

Staking is a relatively new concept and investors are often confused between the high yields associated with staking coins and the security offered in bank deposits. As mentioned earlier, rewards for staking depends on the proportion of the size of your stake to the size of the stake of the network. The higher is your stake in proportion to the network, higher is the probability of you mining the block and higher is the chance of you receiving more rewards. The staking services offered by various crypto exchanges have made life easier for a larger number of investors who do not know much about blockchain technology.

The whole point of staking is not to validate transactions and earn rewards for adding blocks to the blockchain but to improve the robustness, integrity, and security of the network. Staking ultimately leads to contributing to the governance of the network by helping it grow and remain decentralized.

By simply delegating your staking rights to CoinDCX, the proportion of our stake as compared to the mining pool increases. CoinDCX will then be able to provide all stakers with higher rewards.

From an Investor's Perspective

The various investment options available to an investor include government bonds, corporate bonds, fixed deposits, and a lot more. Every investment option comes with a risk and a reward. Investors put money in assets based on their risk appetite. Risk-averse investors prefer investing in assets that ensure a lower but fixed return whereas risk-loving people go for options that have higher price fluctuations and hence chances of higher rewards.

The cryptocurrency market is volatile in nature and prices keep fluctuating on a regular basis, unlike the stock market. This leads to larger capital gains and losses. While banks and other fixed-income bonds guarantee a fixed return, these returns are usually lower than what we get from crypto staking. We have seen how volatile the world has been during the pandemic where several currencies got devalued over the months thus affecting the purchasing power of those countries. A recent news article showed how Bitcoin beat the S&P 500 in Q2 2020 by more than 24%. This shows how well the crypto market has been performing lately as compared to the stock market. There are a few points that every investor must take into consideration when thinking about investing anywhere in the world.

Make sure you do proper and thorough research on the product you are going to invest in. For staking in a particular cryptocurrency do not invest in it based on the expected yield only. Other factors that need to be considered include their market capitalization, trade volume (for liquidity), price growth, volatility, recent news, upcoming events and projects, comparison with its competitors, etc. Once you are done with your research you should decide how much worth of a particular cryptocurrency you must stake. It might happen that the fundamentals of a coin are not good and if the price of the coin starts falling at a much faster rate and it fails to recover, earning an interest payment would not help in the long term.

To conclude, the added benefit of staking for any investor is that they can withdraw their funds as and when needed. There is no need to pay any early withdrawal fines, unlike bank deposits which offer a lower yield and charge early withdrawal penalties. These staking accounts need little to no maintenance costs. According to stakingrewards.com, the market cap of staking isNJ approximately at $18 billion which is commendable considering the less time it has been in the market.