There is a lot of information you should learn before you start using cryptocurrencies. While cryptocurrencies are fairly new, the concept of investing wisely in anything—be it stocks, real estate, cryptocurrencies, etc.—is still a valuable, age-old concept. The fundamentals are pretty universal for all investing. This includes everything from finding the best investment accounts, to reading candlestick charts, and trading without emotions, among many other things. Once you have a firm grasp on the ins and outs of cryptocurrency investing, then you can branch out and learn other concepts. One unique concept is called staking, and it has the potential to be a great source of passive income.
What Is Staking Cryptocurrency?
The process of staking means participating in the actual process of the validation of the transactions in the blockchain. There is a protocol that is used by the cryptocurrency to validate the transaction. Bitcoin uses the proof-of-work protocol. But sadly, that protocol has come across various problems and issues, due to which it cannot be considered as the best protocol to be used for transaction validation. As a result, a new protocol called proof-of-stake was developed.
The proof-of-work, the protocol used by Bitcoin, used miners to validate the transaction. A cryptographic puzzle is given to be solved. Whoever validates a transaction after solving a puzzle gets the reward. But in the case of PoS staking, no miners are used. Rather in this protocol, the users lock their coins, or in other words, stake them. When they have locked a certain number of coins, the protocol randomly assigns the users, who are now called forgers, the ability to validate a transaction. In this process, the more coins you have, the better chance of validating a transaction you get. Once the forger has validated a transaction, he or she will get some sort of reward. The rewards would be calculated based on the number of stakes coins. It would also consider the inflation rate and the age of the funds that are staked.
Another benefit of using the proof-of-stake protocol instead of the proof-of-work protocol is that the validation does not require higher computational power. It all depends on the number of coins you have stakes. This is also beneficial for the environment since less energy is spent, which causes less heat to be released. Proof-of-Stake has a higher level of security. It can be because if a forger tries to validate a transaction that is fraudulent or illegal, then a part of the coins that he has staked will be lost. So, in a way, you are staking your coins to validate a transaction to earn a reward. If you validate an illegal transaction, a part of the coins that you have stacked will be lost. Furthermore, staking coins is also safe because there is no trading involved, rather there is only the process of keeping them in a wallet.
How Does Investing Differ from Staking?
Investing implies options you can go for to increase the amount you obtain. The purpose is to purchase physical assets such as gold and silver coins, platinum and sell them at a higher price range. In this case, it is necessary to opt for assets that increase financial security. Staking is different because it implies holding money in a digital asset to support security. In other words, staking happens to be the act of locking coins to get rewards. In most cases, users are allowed to stake their assets directly from their wallets.
Conclusion
After reading this article, the difference between the process of investing and staking will be made clear. Both options are profitable, but you should remember that it all depends on how much money you have. In the case of staking, you will only get small interest every year, which is similar to traditional banks. Investing should provide much more profit very quickly, but it depends on the amount you are ready to invest. The good news is that you are free to utilize both options if you are eager to earn more.
