Staking is a good option for investors interested in generating yields on their long-term investments who aren’t bothered about short-term fluctuations in price. If you might need your money back in the short term before the staking period ends, you should avoid locking it up for staking.
Rasul advises that you carefully review the terms of the staking period to see how long it lasts and how long it would take to get your money back at the end when you decide to withdraw.
He recommends only working with companies with a positive reputation and high-security standards.
If the interest rates seem too high to be true, you should approach cautiously, experts say.
Last, staking, like any cryptocurrency investment, carries a high risk of losses. Only stake money you can afford to lose.
What is Proof of Stake?
Crypto staking is available with cryptocurrencies or blockchain networks that utilise the Proof-of-Stake model or system. You might sometimes see the model being referred to as the consensus mechanism or consensus algorithm. This is because the computers or people running a crypto network must collectively agree on which transactions should be validated and verified. Only with consensus is a set of transactions recorded to the blockchain ledger.
Proof-of-stake blockchains were developed as an alternative model to the Proof-of-Work model originally used by Bitcoin. The Proof-of-Work model requires the use of specialised mining devices that use intensive computing power to solve highly complex mathematical equations. This then requires participants or miners to operate sophisticated and expensive equipment that cost a lot of money to maintain. Proof-of-Stake does away with these crypto mining rigs so that people can participate in the network’s maintenance simply by committing their digital assets.
As we discussed earlier in how staking works, by committing funds in the shape of crypto, digital assets, or tokens, network participants – called stakers, nodes or validators – must work honestly in the network, validating and verifying transactions correctly, while rejecting malicious or invalid transactions.
Validators risk losing their stake if they were to behave dishonestly. For instance, by accepting malicious or invalid transactions, these dishonest validators would be found out by other honest stakers, and they would lose their rewards. In extreme cases, they could even be disqualified from future rewards or forfeit their stakes.
In return for this committed stakes, stakers typically receive a certain amount of reward in the same crypto that they have staked. Every network has a different process to determine what this reward entails.
Typically, there is a fixed amount of reward for every time a Validator is chosen to validate transactions. When this happens, the validator actually records them as a new set of transaction into the ledger (or the blockchain), generating or “finding” a new “block” to be added to the blockchain. As such, this reward is usually referred to as a block reward.
In addition, the selected Validator also gets to keep any transaction fees or miner fees paid by those submitting transactions to the network. In the case of Ethereum, there are also miner “tips” included in the rewards.
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