If you are aware of the world of cryptocurrency, the term blockchain technology may not be new to you. However, the revolutionary blockchain network has far more uses other than being used in decentralized currencies. To put it simply, one of the key features of blockchain is security. However, maintaining the integrity and updating the security of the blockchain network is an expensive affair, which is why crypto investors are asked to pool their resources and stake them.
Staking cryptocurrencies is the process of holding and locking up a certain amount of cryptocurrency in a digital wallet to support the network and help validate transactions. In return for staking, users earn rewards in the form of additional cryptocurrency.
So why is staking essential for blockchain security? Let’s dive into the reasons in this blog!
- Helps to Secure the Network: Staking crypto assists in securing the network by incentivizing users to hold onto their cryptocurrency for a longer period of time. This reduces the likelihood of sudden sell-offs that can destabilize the network and cause significant price fluctuations. In a proof-of-stake (PoS) system, staking also helps to prevent attacks on the network. In a PoS system, validators are selected based on their stake or the amount of cryptocurrency they hold and have locked up. The more cryptocurrency a validator has, the more likely they are to be selected to validate a block of transactions. This reduces the likelihood of a 51% attack, where a single entity gains control of the network. However, these technicalities may become overwhelming for new stakers. Luckily, this is automatically taken care of if you rely on a facilitator like Kiln.fi. These validators are experts at helping clients stake cryptocurrencies seamlessly. Additionally, staking in pools also becomes simpler with such platforms since they have a large customer base.
- Increases Network Efficiency: This practice can also increase network efficiency in terms of improving privacy and computation while facilitating ease of blockchain operation. In a proof-of-work (PoW) system, miners are required to solve complex mathematical problems to validate transactions and add them to the blockchain. This process requires a significant amount of computational power and energy, leading to high costs and longer transaction times. In a PoS system, stakers only need to hold cryptocurrency in their digital wallet to validate transactions. This reduces the amount of computational power required, resulting in faster transaction times and lower costs.
- Provides Economic Benefits: There are many economic benefits for users in staking by helping them to earn rewards in the form of additional cryptocurrency. This gives users a perk to lock in their cryptocurrency for a substantial period of time, reducing volatility in the market and providing stability for investors. In addition, staking can also provide a passive income stream for users, similar to earning interest on a savings account. This can be especially beneficial for long-term investors who want to hold onto their cryptocurrency for an extended time frame.
- Encourages Community Participation: The process of staking cryptocurrency also encourages community participation in the network. By holding and staking cryptocurrency, users become more invested in the success of the network and are more likely to participate in governance decisions and other community activities. This can help to create a more decentralized and democratic network where decisions are made by the community rather than a centralized authority.
In the future, we’re not only going to witness a wider use of blockchain networks to authenticate transactions but also create a better digital payments environment for all. As blockchain technology continues to evolve, staking will play an increasingly pivotal role in ensuring the security and success of the network. We hope that our blog can give you a few insights into this investing practice and how it can be mutually beneficial.