What is Staking?
Staking is a process in which token holders can earn rewards by helping to secure a blockchain network.
Staking is not an investment product. Staking rewards are not the same as yield. Rather, it enables token holders to earn rewards by delegating their tokens in order to validate transactions on the underlying blockchain, which helps ensure the security and integrity of the network.
With protocol staking, the token holder retains ownership, control, and custody of their tokens at all times.
With lending/liquidity provisioning, the token holder does not.
Staking is only possible on blockchains with a PoS consensus mechanism. For a PoS blockchain to remain robust and secure, each transaction must be verified, and new blocks need to be created.
The act of staking involves putting digital assets to work by verifying transactions and earning a reward in the process. In other words, it aligns network security with financial incentives.
Network participants — known as validators or stakers — are required to stake or ‘lock in’ a certain number of cryptoassets native to the network of their choice. You can think of validators as the backbone of the staking ecosystem as they play a crucial role of authoring new blocks on the blockchain. While a validator’s vote is chosen at random, users who pledge more tokens to the network are more likely to be selected as validators by the protocol.
Risks
Although some core risks of yield generating is diminished, there are still a two notable risks
- The underlying blockchain currency you are warning rewards on can be volatile both in terms of price going up or down
- The platform you use to hold your assets during the staking process
Investors ought to consider that. Digital assets are volatile, meaning that user assets could decline in value quite suddenly. Staking is optimal for investors who plan to hold their asset for the long-term and are able to withstand short-term fluctuations in price.
