Many people may consider staking an easier alternative to mining-one that is less resource-intensive. It can be defined as holding funds in your cryptocurrency wallet in order to support the operations and security of a blockchain network. In simple terms, staking is holding cryptocurrencies so you can earn rewards.
In many cases, you can stake your coins from your cryptocurrency wallet directly. Alternatively, you can take advantage of the staking services offered by exchanges. With Binance Staking, for instance, you can earn rewards by simply having your crypto-coins on the exchange.
You will need to first understand Proof of Stake (PoS) and how it works if you want to better understand staking. Proof of Stake is a consensus mechanism that lets blockchains operate in a more energy-efficient manner while maintaining some degree of decentralization.
Take a closer look.
What Is PoS (Proof of Stake)?
You might already know about PoW (Proof of Work) if you know about Bitcoin and how it works. It is the process through which transactions are gathered into blocks. These blocks are then connected to make the blockchain. Miners typically compete to find a solution for a difficult mathematical puzzle. The miner that solves it first gets to add the next blockchain block.
PoW is a robust mechanism but it involves too much arbitrary computation. The only purpose of the puzzle that miners solve is to ensure the network is secure. It has no other purpose. Some people could argue that this alone justifies the excess of computation.
But someone else may wonder: is the high computational cost really necessary in maintaining decentralized consensus?
That is where Proof of Stake comes in. Participants can hold their “stake” or coins. The protocol will then randomly assign one participant the right to add the next block. The amount of coins one has determines the probability of being picked. So if one has more coins, their chances are higher.
Unlike with PoW, participants are not chosen depending on their ability to find the solution to a complex challenge. It will depend on the amount of staking coins one is holding.