Discover more from Finceptor
Token Staking: How Does it Work? | OpenPad DeFi
The holy grail of passive income, today we take a closer look at token staking mechanisms and how they work.
Staking is the process of temporarily "locking up" a portion of your crypto holdings to support a blockchain network in exchange for incentives.
You may gain more tokens and certain voting rights by staking, which is one of the benefits.
Staking is also risky since crypto is volatile—you may need to pay fees, and won't have access to your holdings should you need to access.
Name of the game is passive income, that’s what we all want at the end of the day, an effortless ticket to financial freedom. Everyone loves the alluring concept quitting their 9 to 5 through means of passive income, earning that sweet sweet way to declaring economic flexibility by doing absolutely nothing, but somethings are too good to be true, the unfortunate victims of LUNA-UST scandal would surely remind us of that fact. One of the first things that come to mind when talking about this hot topic is surely token staking, but how does it work anyway? Today we are going be analyzing the reasoning behind this mechanism.
In simple terms, staking is one strategy that can even generate a passive income. You simply deposit coins for a fixed period of time to earn interest.
Crypto staking is the process of temporarily "locking up" a portion of your cryptocurrency to support a blockchain network. Staker benefits can be obtained in return, usually in the form of extra coins or tokens.
Staking functions similarly to interest accounts at traditional banks. Traditional banks charge interest because they utilize your money for investments and loans, among other things. Your cryptocurrency is used in staking as well. The phrase "staking" refers to the Proof of Stake, or "PoS," system, in which currencies that have been staked are used to confirm blockchain transactions.
On the blockchain, verified transactions create new blocks. Proof of stake is required for the process of staking for cryptocurrencies that support it. Each time a new block is successfully created, someone is rewarded.
What’s in it for the Protocols?
A particular network's protocol locks up an investor's holdings — similar to depositing money in a bank, and agreeing not to withdraw it for a set time period, which benefits the network in a couple of ways.
First, this can increase the value of a token by limiting the supply. Second, the tokens can be used to govern the blockchain if the network uses a proof-of-stake (PoS) system. A PoS system — as opposed to a proof-of-work (PoW) one, which incorporates "mining" — can be fairly complicated, especially for crypto newcomers.
Depending on how much of their total holdings are being staked, and the length that they're being staked for, a staker can earn a proportional reward by forging. Stakers can also pool their holdings to meet any required minimums, too, into a "staking pool." It's also possible to "cold stake" on some networks, which involves staking coins or tokens that are held in a "cold" wallet, or one that is kept offline.
Staking, compared to mining, is far more efficient. It also comes with the benefit of potentially increasing transaction speed and lowering fees.
Proof of stake doesn’t require stakers to solve problems; it just requires them to deposit their coins.
There are some experts who believe that crypto staking will ultimately make mining obsolete. Mining started off as an option for users to earn Bitcoin at home, when Bitcoin was worth a whole lot less. With more widespread adoption, the bar for mining has gotten a whole lot higher. Staking is still accessible to the average crypto investor.
Staking can increase the value of a token by limiting the supply.
OpenPad will utilize this exact mechanism, which in turn is a win-win scenario for both the project and the investors. With a state-of-the-art tokenomics design, creating a future-proof mechanism that equally benefits everyone and looks out for the underdogs is exactly what we set out to do.
To conclude we leave you with the good old pros and cons list of staking:
Cons of Staking Crypto
May be locked into a fixed term
Risk of slashing penalty
May incur fees
Pros of Staking Crypto
Earn interest on crypto
Faster, cheaper transactions
More energy efficient
Potential voting rights
Resources to Learn & Invest with OpenPad
🕸 Home: openpad.app
📖 Docs: docs.openpad.app
🧢 Twitter: twitter.com/OpenPadCitizens
📒 Web3 Newsletter: openpad.substack.com
🔗 Official Links: linktr.ee/openpad
Thanks for reading OpenPad! Subscribe for undistorted and unspoken facts for Web3 investment, DAOs and DeFi.