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What Is Crypto Staking & How Does It Work?
To understand what crypto staking is, we first need to understand what staking is itself.
Staking means you have a commitment or a vested interest in something. Just like a stakeholder in a company is directly impacted by the company’s performance, or a player in a card game wants a hand to go their way, staking is all about creating a financial interest.
Cryptocurrency staking is a new way of validating transactions. Rather than having an unlimited number of nodes all using computing power to compete for the same goal, nodes instead put forward a crypto stake. This stake means they ‘promise’ to be online and available if called upon to validate a transaction. The stake is lost if the node is not online and unavailable.
Crypto staking is similar to interest paid by a bank to a savings account. With crypto staking, cryptocurrency networks reward users who leave money in their wallets with a staking reward. This gives investors a chance to profit without engaging in market analysis and direct trading.
For most traders and investors, the process of staking crypto is a very easy one. Here’s how it works:
To begin with, you will stake your crypto. This simply means leaving the crypto accessible to the network during the transaction validation phase.
When a new transaction needs to be validated, the network will use the staked amount as a factor while selecting the node that will validate the transaction. Generally, the selection process is weighted towards the node and user that has staked the most. This stake is essentially a 'pledge of availability' — the node must be online when it is called upon. If it isn't, you could lose the amount you have staked.
A new transaction is validated, and a new block is added to the blockchain. This is now part of the immutable record that forms the DNA of the cryptocurrency network. A copy of this chain is shared across all active network nodes to ensure full consensus and decentralisation.
In exchange for putting up their crypto holdings as a stake and validating the transaction, the node receives a crypto reward. Any holdings used in the validation process are returned, along with a further award, which means the node and its owner — the crypto user — have turned a profit.
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