Staking: what is it?

Staking what is it

the staking consists of immobilizing crypto-assets for a long period and being rewarded at the end of it. Although it is subject to risk, it is a fairly quiet investment method, accessible to all budgets and generally profitable.

When we talk about staking in French, there may be some ambiguity. Indeed, this word is translated differently depending on whether we are talking about staking to designate the fact of immobilizing / blocking crypto-assets on a platform or on a wallet for several weeks or months. On the other hand, if we refer to the transaction validation method called proof of stake, this expression is usually translated as “proof of stake”. It might sound strange, but it is indeed the same term referred to in both cases.

The “proof of stake”

One of the characteristics of cryptocurrencies is that transactions are validated through a complex computer calculation. the Bitcoin and the cryptocurrencies that emerged in its wake use a system called the ” mining Which leads minors to produce a proof of work or “proof of work”. In the long term, this system has shown some weaknesses. While it is extremely reliable, it requires enormous computing power and therefore results in very high power consumption and slowness in processing transactions. What is more, the gas fees (commission charged by minors) can be very high.

To overcome these problems, more recent cryptocurrencies have generally adopted another validation system: the proof of stake / “Proof of stake”. When a blockchain is based on a “proof of stake”, the system chooses a limited number of players called validators. They must be permanently connected and are responsible for validating transactions. To be able to be a validator, you must first agree to staker / block a significant amount of the currency in question. This is the logic: a validator would have no interest in rigging the system since he himself has a large amount of this currency. For example, on the blockchain Avalanche, it is necessary staker a minimum of 2,000 Avax to be able to obtain the status of validator.

In order to prevent this approach from favoring only the largest investors, certain refinements have been made. For example, the approach pure proof of stake (pure proof of stake), adopted by the currency Algo (from Algorand) selects validators randomly.

Advantage of proof of stake : validation in this way does not require the intervention of computers ultra-powerful. There are even small boxes called Stake Box at a cost of less than 100 euros which can play the role of validator of certain young currencies. And transaction processing is fast.

It should be noted that Ethereum, the second of the cryptocurrencies, started its history by relying on the method of proof of work and that the version Ethereum 2.0 which is gradually being deployed is based on the method of proof of stake.

Staking, from the user’s point of view

Most cryptocurrency users do not particularly seek to use their computers to validate transactions. Above all, they seek to benefit from an attractive investment. the staking is one of these methods and it involves – as in the case of the validators mentioned above – to immobilize a certain volume of crypto-assets during a certain duration. The difference is that there is no minimum investment required. It is possible to store the equivalent of 50 euros as well as 50,000 euros. the staking is therefore accessible to all budgets.

What is the logic at work for the staking cryptoassets? It is simple. Let’s take an example with a given currency. If you agree to acquire a certain number of Matic (Polygon) and you consent to them staker, you indicate by this that you have confidence in this currency since you will not touch your assets in Matic during a certain period. You therefore help increase the capitalization of Matic and maintain it over time. Others might want to acquire Matic because of this capitalization. As a reward for trusting him, Polygon decrees that he will grant you a certain number of additional Matics at the end of the staking.

The one who stake a currency is sometimes called a Holder.

The site Staking Reward lists the main cryptocurrencies that can be staked. The 4e table column Reward indicates what is the gain that can be obtained annually.

For example, for the NGM currency of e-Money, this reward is 17.62%. Clearly, if you stake 1 NGM, you will get 17.62 NGM back at the end of the year, or more than 17 times your stake. And since the NGM is equal to $ 1 at the time of this writing, assuming its price is more or less the same a year later, the dollar invested will have turned into 17.62 dollars. In reality, it should be much more because the staking This is how interest can be “compounded”. One day after starting the staking, your NGM holdings increased slightly – the 17.62% reward applied on a pro rata basis for that day. From the second day, you therefore have 1.04 NGM and the reward is applied to this new asset.

Thus, the gain after one year will be rather 19%. If, on the other hand, the NGM saw its value increase tenfold in one year, you would get back the equivalent of 10 x 19 dollars, or 190 dollars for the dollar you invested. There is therefore a passive income that greatly exceeds what we know in the everyday world. However, these gains are only hypothetical and involve an element of risk. It is also possible that the NGM will see its price collapse, in which case the 19 NGM that we harvest at the end of a year could be worth less than the dollar invested.

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