To invest in cryptocurrencies, we usually think about mining or buying and selling digital assets. However, there is still another way to do this. The so-called staking in the digital currency universe is an alternative to making your crypto assets yield over time. In addition, it is another economic tool to protect against inflation and currency devaluation.
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What is staking in the cryptocurrency universe?
Technically speaking, staking is related to the “proof-of-stake” model in blockchain networks. It is the way many cryptocurrencies verify their transactions and allows investors to earn rewards for their holdings. Therefore, only digital currencies that use this model can be used for this purpose. Some examples are ether (ETH), Cardano (ADA) and Solana (SOL).
Unlike digital asset mining, which involves donating the processing power of machines and computers, staking “commits” your assets to supporting a blockchain network. With this, the holder of the applied cryptocurrencies is rewarded with an interest rate.
For the investor, staking is a way to generate passive income rather than keeping their crypto assets sitting in a digital wallet. Some currencies, for example, offer high-interest rates for investors who choose to stake.
How cryptocurrency staking works
Coinbase, the largest cryptocurrency exchange in the United States, explains in an article that with cryptocurrencies that use the proof-of-stake model, staking is how new transactions are added to the blockchain. It’s like mining for networks that use the proof-of-work model.
In practice, cryptocurrency staking is how the blockchain protocol chooses participants to validate transaction data blocks. So, the more coins you allocate to this model, the more likely you are to receive rewards as new coins are created.
Every time a block is added to the blockchain, new cryptocurrencies are created and distributed as rewards to staking participants on that network. In most cases, the rewards come in the form of the same asset that the investor applied. However, some blockchains use a different type of cryptocurrency for rewards.
If you want to stake, you need to own a cryptocurrency based on the proof-of-stake model. Then, you can choose the amount you want to apply, being possible to do this also by exchanging for other popular digital currencies (cryptocurrency swap).
The coins invested are still yours. While some staking networks and models call for a minimum investment time, others allow for immediate withdrawals. Either way, the holder of the assets is free to withdraw them and exchange them for traditional money or other cryptocurrencies.
Staking is a hedge against devaluation and inflation
The staking model in cryptocurrencies is the best way to maintain a store of value in this alternative and decentralized market. “Making an analogy with a bank, time is an important factor in the store of value. With US$ 1,000 today, you buy some things that, in a while, you will no longer be able to buy due to inflation, currency devaluation, etc.”
In the face of unstable economic times, staking in cryptocurrencies is yet another alternative to store value. However, the investor should always be aware of the volatility of cryptocurrencies and take this into account before making such an application.