What is Staking? What Does It Do?
Staking is a financial term meaning to lock in Turkish. The concept of staking in the cryptocurrency market refers to keeping a cryptocurrency locked in cryptocurrency wallets for a certain period of time. With the staking method, users can win some rewards.
What is Staking?
Staking refers to keeping a cryptocurrency in cryptocurrency wallets for a period of time without spending, transferring or using it for other transactions. During this process, users who store the cryptocurrency in their wallets earn specified rewards for holding the cryptocurrency. Staking rewards can be calculated differently in each blockchain network. Staking rewards; Factors such as the number of validators staked crypto assets, the amount of cryptocurrency staked in the network are decisive.
Differences Between Mining and Staking
-In the mining system; Miners produce cryptocurrencies with the Proof of Work mechanism. In the staking system; validators generate cryptocurrencies with the Proof of Stake mechanism.
-Miners try to solve complex mathematical problems with special hardware devices to verify the blocks in the blockchain. With staking, validators lock crypto assets to nodes in the network and are entitled to verify blocks in the system.
- Blocks verified by miners are added to the blockchain, and miners receive cryptocurrency as a block reward in return. Blocks verified by validators are added to the blockchain and validators earn cryptocurrency by receiving transaction fees.
The amount of blocks miners verify depends on their computational power. The amount of blocks users verify depends on the amount of crypto assets they have locked into nodes.
-Mining is carried out with hardware devices that require high performance. High performance hardware devices are not required for staking.
What Does Staking Do?
Staking has been developed for the purpose of producing a solution against the processing power consumed by mining. The concept of staking entered the cryptocurrency market with the Proof of Stake protocol, which emerged as an alternative to Bitcoin’s Proof of Work protocol. The Proof of Stake protocol is focused on eliminating problems such as the high energy consumption required for Bitcoin mining. With staking, the circulating amount of a cryptocurrency is limited to a certain extent. This situation can increase the value of the cryptocurrency by creating a supply-demand balance.
What is Proof of Stake?
Emerging as an alternative to Bitcoin’s Proof of Work protocol, Proof of Stake is a protocol that considers digital asset ownership rather than a system based on computational power.
In the Proof of Stake protocol, users who want to be able to verify transactions and get a share of the revenue must lock their cryptocurrency holdings to be used for verification. In this locking process, called staking, the amount desired to be used for this transaction cannot be withdrawn from the wallet until it is unlocked and is marked on the network as the user’s share.
What is Imparmanent Loss?
Temporary loss is a concept used to express the difference between the price of a cryptocurrency when it is deposited in the pool and the current price of the cryptocurrency. Calling the change in price difference as a temporary loss has nothing to do with a decrease or increase in price. Accordingly, there is a temporary loss situation whether the price falls or rises. The factor that determines the size of the temporary loss is related to how much the price changes.
Temporary losses are called temporary because the cryptocurrency returns to the price at the time it was deposited in the liquidity pool, preventing the loss. Exiting the pool does not result in a loss when the price of the cryptocurrency returns. However, if the pool is exited at a lower or higher price, not the same price, the temporary loss turns into a permanent loss.
