If you think that this article will be about fine dining, steaks or wines, kindly click the back button because this is about something you might want to try if you want to earn some coins. :)
Staking is another word that I often hear or read when crypto people talk. I can still remember the day when I first earned some fractions of BCH that my friend told me that he was staking other coins, he mentioned that maybe I would be somehow interested in earning that way. And of course, I heard the word "earning" my eyes turned to dollar signs and I just nodded along. But I had no idea what on earth staking was. The only steak I know is that fancy slab on the plate that I rarely consume with a glass of wine on the side. Oh and yes, I like mine medium rare if possible. And today, I'm feeling kind of studious so I read about things related to staking. Surprise surprise! It's not food at all. Too bad.
Cryptocurrency Staking
The definition of staking I gathered from the internet maybe summarized to this : it's an activity in cryptocurrency realm wherein a user holding crypto coins will lock in and hold the funds for a certain period of time for the network to use the funds in completing transactions.
To simplify it further, it's the act of locking in your cryptocurrencies while you wait for them to be rewarded. So somehow, you are making those cryptocurrency work for you to earn additional funds.
How Does it Work?
In theory, it's just like when you put your money in a bank with a time deposit account. You cannot withdraw your funds during a certain period of time and within that time the bank can use your money to invest in something that will earn and you will be given a fraction of that earning in the form of the interests. That is the simple picture, but in actuality, staking is a bit different because when you stake your cryptocurrencies, they will not be moved, nor be used to buy other things, or be invested in other stuff, they will be remain in that place on the blockchain.
To understand it a little bit better, I had to read a bit more regarding Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work is a decentralized consensus mechanism that requires members of the network to solve mathematical puzzles in an effort to keep the security of the system. PoW is the system that is being utilized in mining cryptocurrency. Mining is basically the way the system use to validate, to process and to complete cryptocurrency transactions.
And if you are familiar with mining cryptocurrencies, this activity requires and consumes a lot of computing and electrical power that is why the sales for Graphics Processing Units (GPUs) and graphics card skyrocketed. These devices are essential if you wan to partake in mining cryptocurrency like bitcoin.
Proof of Stake is another consensus mechanism that is developed as an alternative to PoW. In PoS you are also in a way "mining" cryptocurrency but instead of using GPUs and electrical power, you are using your "locked" cryptocurrencies. The higher the amount of your staked coins, the higher your chance is for the rewards. Since all you need to do is lock in your funds in staking to "mine" cryptocurrency, you won't have to buy expensive GPUs and you won't use much of your electrical supply. All you have to do is to hold your coins and not to withdraw, transfer, or sell them in a certain period of time while they are still "working".
Risks of Staking
At a glance, staking looks like a sure way to earn cryptocurrency, it's pretty ideal for long-term hodlers who are not really active in trading cryptos. All you have to do is deposit some funds and let your coins go to work and earn you some more. But then again, it's just ideal, investing in any thing have risks of their own and staking is not spared from that truth. Staking your coins also have risks tied with it.
Losing Funds
You read that right. You may lose your cryptocurrency holdings when you stake them. Well, actually this is somehow true about any investment scheme. Many reasons may cause the loss of your funds. Of course you are taking out your funds from your own wallet (assuming you're not doing a hardware/cold staking ), so you have no control of them. Hacks and other scam can also cause the loss.
That can also be considered true in any sense, so just back up and secure your wallets and their information specifically your private keys and/or seed phrases. I also have mine written on a traditional paper so they are safe and secured, even I can't read them. I do not understand my own handwriting so there's that.
Volatility
As a distinct characteristic of cryptocurrency, volatility will always be a factor in any thing related to crypto. Since your funds will be in a locked state in a period of time, you cannot do anything with them during the set period. The price may go up to the moon, but you can't sell them since they are locked.
Minimum Amount
Some services or networks that offer staking features require minimum amount of a cryptocurrency to be staked. So with that, you are risking the entirety of that amount. And as the experts would always say, never invest what you can't afford to lose.
Reward Amount
Since the earnings of your staking will come in the form of "rewards", the amount may not be fixedly guaranteed. They can vary inside a certain range or none at all. It is also possible that you may not earn any rewards when you are supposed to earn them.
Conclusion
I have found something alluring about staking when I have read all of these today. It's not that big a move but it is certainly a step towards cryptocurrency literacy. I thought that I had to try it and today, I finally did. I will gladly impart my experience with it another time. But for now, that's all what I learned with staking, so far. I'll see you on the next lecture.
Hey there!
Thank you for sharing the path of learning with me. Step by step I am trying to learn anything I can in the world of crypto and at the same time I am sharing what I learn. It's more fun that way, don't you agree?
So as always, can you share some of your thoughts about this topic? Anything will be appreciated so I'll be waiting on the comment section for you.
As always,
Cheers, let's have some wine to go with the "stake" shall we?
Sources:
Lead Image : https://justcook.butcherbox.com/wine-with-steak-beef-chef/
Image 1 : https://usenobi.com/blog/choosing-between-crypto-mining-and-crypto-staking/
Image 2 : https://en.cryptonomist.ch/2020/06/30/what-is-crypto-staking-hybrid-investment-products/
https://www.investopedia.com/terms/p/proof-stake-pos.asp
https://www.investopedia.com/terms/p/proof-work.asp
https://community.trustwallet.com/t/the-risks-of-staking/672
https://medium.com/stakin/risks-in-crypto-staking-66f8bb9067ec
...and you will also help the author collect more tips.
I want to stake but my BCH wallet can't. Personally, the Trust wallet is not available on my phone so I don't have choice but to feel bad. However, my friend on read.cash and noise.cash said that I must try SafePal wallet but the conversion of BCH to BNB have big minimum conversion so in the end, I will not try it.