Understanding the concept of Staking Crypto

Greetings dear friends,
It's another day of the week and I'm delighted to share with you all once again another interesting article that I believe will be beneficiary to all of her users on the Steemit platform.

Since we are here on the Steemit platform, we are all crypto traders in one way though most of us don't know that because we believe that traders are only those who analyze the market and then place an order for a buy or sell and make a profit if the price goes their direction or make a loss if it goes against them.

Every Steemian here has an exchange 💱 platform where he or she trades his or her crypto asset directly or indirectly. Sometimes we keep this asset just idle in the exchange without putting it to use and that is why I want to discuss the concept of staking so that you can maximize profit while keeping your asset in your exchange wallet.

What is Staking?

Staking in a simpler term can be seen as the process of locking a certain amount of your coins for some certain period and locking this coin contributes to the growth of the platform or exchange 💱 and they in turn give you some certain reward for contributing to their system through the staking process.

So the rewards one gets from staking are directly proportional to the amount of assets one locks. This means that someone who locks more assets is expected to get more reward than the person who locks a little.

In Steemit, we also stake in a certain way i.e. the powering up of our Steem Power and using it to vote and support other users. When we do that, we are helping to reduce the amount of Steem in exchanges and also providing more availability of Steem to the Steemit platform.

Also, you earn here by doing little activities such as voting on other users' posts. So this is a good example of staking here on the Steemit platform.

How Does Staking Work

Here I want to discuss two consensus mechanisms used in staking, there are many others but we will dwell on just these two at the moment. So we will be looking at the Proof of Stake (PoS) consensus mechanism and the Proof of Work (PoW) consensus mechanism.

The above-listed mechanism operates differently when it comes to validating networks. In the case of the Proof of Stake (PoS) as the name suggests it uses staking to validate blocks in the network whereas the Proof of Work (PoW) uses mining ⛏️ to validate blocks in the network.

Rewards in both also are gotten differently in the case of the Proof of Stake (PoS), miners are rewarded based on the amount they commit to the project i.e based on the amount the lock, the higher the amount you lock the more reward you get when the blocks are been validated.

In the same way, for the Proof of Work (PoW), miners here are rewarded based on who performs more computational activities in validating the blocks or transactions in the blockchain. So as you can see staking has to be either through POS or POW from the context I have explained above.

Who Benefits From Staking (POS)

Both participants and the project itself benefit from staking. Here we are going to be taking into consideration the POS mechanism as a case study and how it is beneficiary to both the participants and the project itself.

Earning passive income: Proof of stack helps the participant to earn passive income by just committing or locking their asset for some time. This means instead of keeping the asset ideal you can make money from staking it without really doing any work.

No cost attached: Unlike the POW mechanism where you need big devices and machines, here you can just lock your asset without purchasing any machines to assist you in the mining process.

Secure and profitable: In this aspect, you can be able to know what you will end at the end of your staking period because you already know the return you will earn every day but the case of POW is not the same.

Decentralisation for the project: In the case of the project, it helps bring decentralization because all those who commit to the project have become automatic shareholders and they too must be contacted before any decision is made.

Risks Associated With Staking

Just like we have some benefits associated with staking, there are also some risks associated with it, and these risks we will discuss below.

Coin lockup: Staking means locking your coin for a given period hence one of the risks is that you won't be able to use this coin within the period it is locked and even if you want to unstable before the time you initially gave you won't get the expected reward.

Unstaking time: If you wish to unstable your coin because there is an opportunity to earn more, the coin won't be returned to you immediately hence you may miss out on the opportunity.

Just like collecting your delegation, it takes at least 5 days for the delegation to return to your wallet and within that period the power will be wasted because you can't use it anywhere.

Price decline risk: This is a major problem with staking an asset. For instance, you bought a certain coin at the rate of $20 and then stake and there is a price decline that brings the coin back to $10. You will notice that you have lost money because when you were supposed to sell it and minimize loss you didn't.

What to consider before staking

There are lots of things we need to consider before taking any coin in any exchange 💱 of our choices. We have earlier discussed the benefits and the risk associated with staking and below we see what we must consider before staking.

Lockup Period: Here you have to take note of the locking period of the coin and then choose wishes depending on how long you are ready to lock the asset.

Unlocking Period: Here also consider how long it will take for you to have access to it after you have unlocked the coins. Some staked coins take days or weeks to return to the owner.

Staking Interest Rate: Here you look at the interest you will earn within a period due to the amount you have decided to stake. You can check to see if it's profitable or not.

Minimum Amount: Check the minimum amount that you need to start the journey of the staking and be sure that you have it and it's something you can afford.

Conclusion

Staking a crypto asset means locking your crypto asset for some period and then earning a reward from the staked asset depending on how long you have locked the asset and the amount or quantity you have locked. The higher the locked asset the higher the profit the lesser the locked asset the lesser the profit.

Remember also that trading is like meditation, patience is the key. Always wait for the market to come to you and not for you to go to the market. Learn to identify your key support and resistance level and also trade with the trend and in that way, you will be a successful trader.

Finally, I want to thank you all for reading through my post today. If you have any questions or contributions, please do well to use the comment section of this post. See you all in my next publication.

Disclaimer: ^{This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your research and consult a financial advisor.}

NB: All images except otherwise stated are mine and are edited on canvas.