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digital currency staking; Locking cryptocurrencies for profit

What are the methods of staking digital currencies?
What are the methods of staking digital currencies?
اکتبر 3, 2023
Under this condition, Dogecoin will reach $1 | Full analysis
Under this condition, Dogecoin will reach $1 | Full analysis
اکتبر 4, 2023
digital currency staking

digital currency staking

One of the ways to make a profit in the cryptocurrency market is to sell digital assets in a bullish market. But fortunately, due to the breadth of blockchain technology, making money in this market is not limited to buying and selling encrypted coins, and there are other ways, such as staking, to increase income and profit from this market.

By using the staking method, you can use your assets without having to sell cryptocurrencies and create a passive income in dollars. But what is staking or staking? Staking is almost similar to the model of depositing in the bank, which is given a certain percentage to the balance of the interest account.

But if we want to examine staking a little more specifically, we must say that staking of cryptocurrencies is a new blockchain solution developed with the aim of replacing digital currency extraction or mining. Staking has many more advantages than mining.

A significant reduction in electricity consumption, processing resources and lower required capital are among the most important benefits of staking. But note that only cryptocurrencies can be staked, whose mechanism is compatible with the proof-of-stake mechanism.

Popular cryptocurrencies such as Ethereum 2.0, Cardano, and Tezos are PoS-based and use a proof-of-stake consensus mechanism to validate transactions. But Bitcoin uses Proof of Work (PoW) mechanism, so it is not possible to stake Bitcoin.

How is staking done?

Digital currency staking means buying a certain amount of the native token of a network and keeping it in a cryptocurrency wallet (wallet) or a platform with the aim of receiving rewards! Simply put, staking means locking a digital currency in order to receive rewards.

By using this method, in addition to receiving staking rewards, depositors may also receive double profits from the price growth of the token. Staking operations are similar to the term deposit scheme in banks and financial institutions.

To better understand this issue, we will examine together how to make a deposit in the bank. The customer deposits a certain amount (equal to or above the set floor) into the account and this amount must be locked in the account for a certain period of time. At the end of each month, interest is added to the account balance and deposited into the individual’s account.

Now that you are familiar with the concept of staking, it is time to describe this operation in the blockchain. When you stake a digital currency, you become a node in the network. Nodes are responsible for verifying and verifying transactions as well as ensuring network security. Network nodes are called validators.

Among the validators of the blockchain protocol network, it randomly selects one of the nodes and gives that node the opportunity to validate the next block. Usually, nodes that have staked or deposited more coins have a higher chance of being selected. In other words, the chance of a node being selected to add a new block to the network is proportional to the amount of staked digital currency.

There are two main methods for steak; The first method is to use a hardware wallet, which is called cold staking or offline. The second method is to store digital currencies in a personal software wallet such as TrustVault or an exchange wallet.

How is staking done?

How is staking done?

It is better to introduce the proof-of-stake consensus mechanism to better understand the staking process and how it works. Proof of stake (Proof of Stake) is a way to reach consensus in a decentralized way and is more efficient than the consensus mechanism of Proof of Work (PoW). In the next part, we will talk about the performance of the proof-of-stake algorithm. be with us.
What is the Proof of Stake (PoS) algorithm and what does it have to do with staking?

If you are familiar with how Bitcoin works, you probably know that Bitcoin uses a proof-of-work (PoW) mechanism to secure its blockchain network; In this mechanism, network miners compete with each other to solve a complex mathematical problem. The miner who finds the answer to the problem earlier than others can add the next block to the chain of blocks and receive a certain amount of Bitcoin as a reward.

However, providing blockchain security using the proof-of-work consensus mechanism is associated with challenges such as the high cost of setting up a mining rig (mining device), a lot of processing resources, and high electricity consumption; This issue led blockchain engineers to develop a more efficient method called “Proof of Stake”.

In the proof-of-stake mechanism, validation nodes or validators are placed instead of miners. Nodes are individuals or groups of individuals who stake (deposit) their assets to secure the network. In fact, by locking their cryptocurrencies to the network, they get the opportunity to process transactions and add blocks.

In the DPoS method, users who save the main token of the network in their wallets have the right to vote and can participate in the process of electing representatives. They can vote in the voting process for a limited number of representatives (validators) who have the authority to validate transactions and generate blocks.

The elected representatives must stake a certain number of native coins of the network to be fined if they break the rules of the network when creating a block. In delegated proof-of-stake networks, users are not directly responsible for validating transactions; But they receive a reward for their participation.