Staking is the process used by Proof-of-Stake (PoS) blockchains to verify and secure transactions on their networks. Participants can put up or “stake” their crypto for a chance to validate transactions and earn staking rewards.
Staking is a more energy-efficient way to secure a blockchain network than Proof-of-Work (PoW), which is the consensus mechanism used by Bitcoin and many other cryptocurrencies. In PoW, miners compete to solve complex mathematical problems in order to add new blocks to the blockchain. This process requires a lot of computing power and energy. In PoS, validators are chosen to add new blocks to the blockchain based on the amount of cryptocurrency they have staked. This means that there is no need for miners to compete to solve complex problems, which makes PoS more energy-efficient.
Risks When Staking Assets
Staked crypto assets are locked on the relevant blockchain protocol for a duration of time to secure the network and earn rewards. This may present some risks:
• Slashing Risk: Staking may result in losses if the network penalises your validator for malfeasance, whether intentional or due to software issues.
• Liquidity Risk: Some protocols lock staked assets for specific periods, limiting quick access or sale.
• APY Not Guaranteed: Staking yields are determined by the protocol and may vary over time.
• Protocol Risks: Changes or updates to staking protocols can introduce new vulnerability or unforeseen outcomes.
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