In this day and age of global capitalism where money is king, the need for cash pervades across all sections of society. While cash continues to be the key driver of humanity’s never-ending struggle for existence yet, on the other hand, our time is becoming increasingly precious in the fast-paced modern world. In this regard, a notable concept which has cropped up in recent times is that of personal financial independence with the idea of passive income being its central tenet. In simple terms, passive income refers to “income that requires little to no effort to earn and maintain”.
The importance of passive income was aptly highlighted by renowned billionaire investor Warren Buffett who was once quoted as saying “if you don’t find a way to make money while you sleep, you will work until you die”. As the crypto-driven revolution continues to take the financial world by storm, the crypto sector has also latched on to the concept of passive income through the concept of crypto staking which literally allows owners of cryptocurrencies to earn while they sleep.
In general, the two main types of blockchain-based consensus mechanisms are those of proof-of-work (PoW) and proof-of-stake (PoS). In essence, under the PoW mechanism crypto miners would add blocks to chains by validating transactions through finding solutions to complex algorithmic puzzles using the processing power of the miners’ computers. The main operational benefit from the use of the PoW mechanism is that its requirement of computational power offers a shield of defensive safeguard against distributed denial-of-service (DDoS) attacks which prevalence has increased by more than 2.5 times in the last 3 years and which is projected to record a staggering number of 17 million by the end of this year.
Notwithstanding the benefits arising from the use of PoW, a major limitation of this mode of consensus mechanism is that the solving of highly complicated algorithms requires specialized computer hardware which prices are beyond the budget of ordinary crypto miners. Additionally, this computer hardware consume vast amounts of electricity and this renders the large scale use of the PoW mechanism to be incompatible with the principles of environmental conservation which compliance is becoming increasingly critical in view of the destructive effects of climate changes engulfing various parts of our globe. These limitations of the PoW mechanism eventually led to the advent of crypto staking under the PoS mechanism which strived to embody the spirit of investment democratization of cryptocurrencies in general.
The concept of crypto staking under the PoS mechanism rewards owners of cryptocurrencies who store their cryptocurrencies in crypto wallets to support the operations of blockchain networks. As utopian as this may sound, crypto staking allows the owners of cryptocurrencies to stake their cryptocurrencies by committing these cryptocurrencies to the service of a blockchain network by storing the cryptocurrencies in crypto wallets. The staked cryptocurrencies would then be used to validate transactions on the blockchain network and the owners would be rewarded with new tokens of the staked cryptocurrencies. As a higher amount of staked cryptocurrencies equates to greater validation power, the rewards received by owners of cryptocurrencies would be based on the amount of cryptocurrencies staked by the owners i.e. the amount of cryptocurrencies stored in their crypto wallets.
Given the fact that rewards for crypto staking are in the form of new tokens of the staked cryptocurrencies, the concept of staking engenders the benefit of compound interest which provides for the reinvesting of interest. To put it simply, the reward in the form of new tokens i.e. the interest can be kept in the owner’s crypto wallet to generate additional new tokens moving forwards. Indeed, the benefit of compound interest may render the concept of staking to be the perfect epitome of passive income which in turn enable it to serve as a gateway to the personal financial independence of owners of cryptocurrencies.
True to the underlying spirit of democratizing investments embodied by the crypto world, the concept of crypto staking paves the way for greater participation in mining activities among the general public by lowering the barriers of entry by dispensing with the need for costly computer hardware. As cryptocurrencies continue to herald the era of digital technological revolution for the global financial investment landscape, the advent of the concept of crypto staking may just be the precursor which the crypto world needs to leverage the network effect phenomenon stemming from the mass adoption and use of cryptocurrencies across the four corners of the world.
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