Polkadot staking allows holders of this cryptocurrency to earn additional income. Similar to earning interest on a savings account, investors can generate interest on their deposits. To understand how to earn rewards through Polkadot staking, it's necessary to
delve into the workings of the blockchain.
How does Polkadot staking work?
The blockchain consists of a chain of blocks that list transactions. It was important to ensure that no external mechanism controlled individual transactions or interfered with the chain. Therefore, each block is encrypted and the next block starts with the key from the previous one. When a new block is added (every 10 minutes, for example, in Bitcoin), the entire transaction path is saved by all network participants. This construction principle guarantees the security of cryptocurrencies while eliminating falsification.
However, the difficulty was in determining which participant collects blocks, verifies them, and creates new ones. In the case of Bitcoin, the problem was solved by allowing users to participate in the creation of new blocks through mining. This involves special equipment solving complex computational tasks, and identifying the miner allowed to check and collect a new block. The crypto miner receives a fixed reward that decreases as mining difficulty grows. This worked well until cryptocurrencies became so popular that many started mining, resulting in increased difficulty and reduced income.
Any Bitcoin transaction consumes a lot of electricity, so a new algorithm was developed: proof-of-stake. This consensus is used for tokens like ETH, SOL, ADA, TON, and others. (But Bitcoin still operates exclusively on the proof-of-work mechanism.)
The PoS mechanism selects a random network participant who takes on the task of forming a new block. Users who hold and provide tokens for the proof-of-stake consensus have a greater chance of being selected. Using the PoS method, the elected "validator" receives transaction fees as a reward. This is the essence of so-called staking. A user provides tokens, they are frozen on the account, then after a period chosen by the user, they are unfrozen, and the user receives a profit in the form of the same cryptocurrency.
How are interest rates paid in Polkadot staking?
When receiving rewards for staking, it is important to differentiate between the staking method and duration chosen. For example, if you are using a wallet that holds a copy of the Polkadot blockchain, you will only receive earned rewards if you are selected as a validator.
In a pool, which has a higher chance of being selected due to its high capital, rewards are collected and paid out at the end of a specific time period. In most cases, this is done at the end of the month to be able to calculate a fair average. Participants then receive their share of the interest.
What type of investor is suited for Polkadot staking?
Polkadot staking can be complex when manually setting staking parameters. But with automatic trading on an exchange, you can easily stake Polkadot. With an online broker, you need to select the cryptocurrency you are willing to stake for a certain period. You should keep in mind that you will not be able to get rid of the cryptocurrency during this period. If the chosen cryptocurrency loses value during this time, you will not be able to sell it quickly.
Through exchanges, any investor, from a beginner with a small capital to a professional, can participate in staking. However, this type of investment is more relevant for long-term investment goals.
Possible risks
One of the biggest drawbacks of Polkadot staking is that your staked capital is unavailable to you for a certain period of time. The cryptocurrency is frozen, and you cannot sell it in case of its growth or decline. Of course, you can stop staking at any time, but in most cases, premature termination will result in the loss of rewards already earned for that period. But despite everything, the benefits of Polkadot staking outweigh the risks.
Advantages:
- Monthly income.
- Safe storage.
- Proof-of-stake consensus is becoming increasingly popular.
- Easy access.
Disadvantages:
- Price risks.
- Freezing set for a certain period of time.
