What Does Staking Mean in Crypto and How Does It Work?
In a decentralized system, you must have heard about staking. But what does staking mean in crypto? In crypto staking, participants lock up a few coins as a stake on exchange to earn a transaction fee as a reward. The working principle of crypto staking is proof-of-stake. Let's explore more about crypto staking.
What Is Proof of Stake?
In proof of work, mining companies remain in the race to crack complicated math problems first. Only one wins and gets a reward crypto coin out of several competitors, whereas the rest waste energy and resources. An alternative method known as proof of stake is suggested to solve this problem. Instead of becoming a part of the race, competitors stake actual coins. The selected candidate solves the puzzle and gets a reward. As a result, a particular block gets updated on the ledger. At the same time, the wrong solution results in the taking away of a few locked-up coins.
A large number of coins use proof of stake such as:
How to Choose a Validator?
When we ask, what does staking mean in crypto? Then validator is an important term to know. The one who stakes the coin and strives to break difficult problems is known as a validator. In terms of mining, the validator is known as a miner.
We need to select a particular validator for solving the puzzle. But how will we choose one among thousands? There are a few factors based on which validator is chosen:
- Who stake more coins
- How long coins have been staked
How Does Staking Work?
Your network-connected computer is known as a node. Moreover, the coins you lock up are your stake. When you are ready with your node and stake, you are ready for the contest. One with many stacked coins will get the opportunity to solve the complex math problem first. The verified block is added to the blockchain, and the validator gets the transaction fee in the reward, which he has to divide among all competitors.
Hence, crypto staking is a better method as we can earn more crypto through staking. In terms of interest rate, staking generates more interest than mining. Moreover, it overcomes the issues and flaws present in the old proof-of-work system.