Staking – what is it in cryptocurrencies?
Staking is a form of passive income that replaces mining for cryptocurrencies based on the Proof-of-Stake algorithm. To engage in staking, you only need to hold the coins, making it similar to a traditional bank deposit. Staking rewards are typically paid in the same cryptocurrency.
Staking replaces mining because holding the coins facilitates the operations of the blockchain network, and users are rewarded for this. Staking does not require significant computational power, ASICs, or graphics cards, making it more environmentally friendly and energy-efficient.
In addition to using the coins in the network as validators, locking the coins during staking also provides protection against inflation. By keeping the coins staked in the network, a balance between supply and demand can be maintained. Staking is becoming increasingly popular, including among institutional investors. Some companies invest significant sums in altcoins like Cardano or Solana to generate income from staking.
There are several types of staking:
- Fixed staking: When choosing this option, the coins will be locked in the account for a specific period. It is possible to withdraw them before the lock-up period ends, usually within 24 hours. However, if you do, all the accrued interest during the lock-up period will be forfeited, and you will only receive back the same amount of coins you initially staked.
- Indefinite staking: With this option, you can keep the coins in your account for as long as you want and withdraw them at any time without losing the accrued interest. However, the interest rates for indefinite staking are usually significantly lower than those for fixed staking.
- DeFi staking: It involves lending through smart contracts. The coin holder provides their coins as a loan and earns interest in return. DeFi staking combines high profitability with guaranteed payouts since the smart contract and the platform through which the transaction is conducted protect the lender.