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Cryptocurrency Staking: An Introduction For Beginners

Until a few years ago, mining was the dominant way to earn money from cryptocurrency (except investing and trading). People could build computers or purchase specialized computers for mining and receive cryptocurrencies as rewards for helping to secure their networks.

Consensus algorithms that involve staking cryptocurrency have been on the rise, and have garnered interest from parties who would rather not purchase or maintain a mining rig. Staking also eliminates the inconvenience associated with:

  1. Calculating operating costs (such as maintenance and power consumption) of a miner and determining if it will generate a positive return on investment.
  2. Upgrading miners due to obsolescence.
  3. The uncomfortable noise levels of miners.
  4. Significant losses associated with the uncertain nature of mining.

Staking rapidly rose to fame due to its simple, low-risk nature. If you want to stake tokens on Matic Network for example, the staked amount of MATIC tokens would be locked in a smart contract.You would then be paid what is referred to as ‘staking rewards’. Staking rewards are a percentage of the amount of tokens you have staked. Your staking rewards would be paid with MATIC tokens in this case.

If you want to stake MATIC tokens without running a validator node, you can simply delegate them to an existing validator (a simple task) in a matter of seconds using the staking user interface (UI) or a compatible wallet that supports staking. The good side of delegation is that you don’t have to launch your own node, and you will also be able to stake from a regular PC, Android or iOS phone without expending valuable resources such as RAM or processing power (when mobile staking is rolled out in the future).

On the other hand, the validator you stake with has to cover the cost of resources required by their node. This means that you will be paid a portion of that validators’ rewards instead of the full amount. However, validators do have to compete with each other to provide competitive rates to delegators. Find a validator that provides generous rewards, and which you also trust to secure the network. You should also choose a validator that doesn’t have an excessive amount of voting power over the network and one with a high uptime rating (this is a good way to reward reliable validators).

As is the case with mining, staking rewards are generated via inflation (the creation of new tokens) and transaction fees. Inflation is a concept that has actually driven some people away from fiat currency to cryptocurrencies. However, one of the greatest issues with fiat currency inflation is excessive, unchecked currency generation done on a whim (something that often balloons out of control during economic recessions). 

Many cryptocurrencies have a fixed token generation rate that can’t be increased without agreement from their token holders or nodes + miners. This is a major perk of community-run platforms! The people decide. The concept of staking has the potential to reduce volatility if enough people do it. This is because you earn staking rewards only while you have your tokens staked. If you sell them, they won’t generate staking revenue.

Some networks, such as EOS.IO took steps such as imposing an unstaking period that (whether intentionally or not) deters you from unstaking. This could also deter users from staking, as their funds would be locked in a contract for 3 days. Other solutions like Matic offer a more lucrative deterrent to unstaking — high staking rewards. If you stop accumulating staking rewards every time you decide to unstake and sell your tokens, you might be more inclined to keep them staked. A steady stream of revenue without the stress of trading is an attractive proposition to many people.

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