Experts explained why staking is a more sustainable and energy efficient way to mine cryptocurrencies, and also talked about the risks that an investor who has been holding digital coins in a portfolio for a long time may face.
Staking is becoming a popular investment method not only for retail investors, but also for institutional ones. On March 31, Canadian public company Graph Blockchain announced a $ 300,000 investment in Cardano. With this capital, the company plans to generate additional profits through staking.
What is staking
Staking is a way of passive earnings in which users store coins on the Proof of Stake (PoS) algorithm and ensure the blockchain remains operational. This gives them the right to make a profit. This option is only available to cryptocurrencies that run on PoS, such as EOS, Tezos, TRON and Cosmos. In the future, Ethereum, the largest altcoin by capitalization, plans to switch to the PoS algorithm.
Staking completely replaces mining and makes it possible to extract new blocks without using large computing power. The point of staking is to ensure all operations on the blockchain and support the network. For this, holders of digital coins receive a reward. The more tokens a holder has, the more likely he is to become the creator of a new block.
How staking differs from mining
Mining is the process that ensures the performance of blockchains powered by the Proof of Work (PoW) algorithm. The first cryptocurrency, bitcoin, works on this algorithm. With the help of computing power, miners support the operation of the network and the execution of transactions in it, and for this they receive a reward. If mining can be called a competition of computing power, then staking is a competition between the owners of coins of a certain blockchain, says Maxim Krupyshev, CEO of the crypto payment system Coinspaid.
According to him, the main difference between staking and mining is that staking does not require large computing power, buying video cards or ASIC miners. Accordingly, staking is a more environmentally friendly and energy efficient way to create a new blockchain in the blockchain, Krupyshev noted. He believes that another advantage of staking is the fact that the owner of a cryptocurrency does not need to have the technical skills necessary to run and maintain a computer.
“Mining requires more involvement in the process, you have to constantly keep your finger on the pulse. In the case of staking, the process is simplified and open to a larger number of members of the blockchain community, the threshold for entering staking is lower than the threshold for entering mining, ”added Coinspaid CEO.
In general, staking looks like a less risky way of investing, since you do not need to buy physical equipment, but so far there is no adequate information on staking – how it works, what risks and what income it brings, explained Sergey Troshin, head of the Six Nines data center. He argues that no one plans to “throw themselves headlong” into staking until it brings in excess profits. As in mining there is a risk of investing in equipment that can become illiquid, so in staking there is a risk of changing the value of the held coin, Troshin added.
How to get started and choose a coin to stake
To start staking, you need to have free funds to buy coins and the ability to freeze them for a long time on a special deposit smart contract, explained Maxim Krupyshev. You need to understand that investments may be required quite significant, said the head of the fintech company Exantech Denis Voskvitsov. According to him, 1,000 coins are needed to stake DASH ($ 225.3K, according to Coingecko as of April 1). Therefore, Denis Voskvitsov advises choosing cryptocurrencies for staking based on the budget.