What is cryptocurrency staking and why is it booming

When we talk about staking, we mean guarantee funds. This is a model that guarantees debts in the event of defaults to banks and that in Colombia is designed to support access to credit for small, medium and large companies. In other words, the investment fund is the support given to a financial institution in the event that the debtor does not pay the bank the debt it has assumed.

But, this model, which is not exclusive to a country like Colombia, also exists in the world of cryptocurrencies. With the intention of combating the risks of investing in a digital currency, investment funds have been created, in which many users have begun to identify a savings system that protects against devaluation and that generates passive income.

This is demonstrated by a study conducted by Binance, the cryptocurrency exchange platform, which noted that 39% of its users use digital assets to invest them long term in the mode in question. Likewise, in the Colombian case, the report noted, it is evident that 30% of its users use this modality, not only to earn extra money, but also to safeguard it from contexts such as inflation.

Thus, having a wallet or smart contract, the user is not only free to choose the cryptocurrency in which they want to invest, but also to decide how long they want to keep this money in this status in order to receive a reward as interest.

By keeping a number of cryptocurrencies locked, the exchange systems guarantee their security, because only when users attest to the transactions do they proceed to make the corresponding disbursements. From this perspective, when a user decides to invest part of their resources in staking, they receive in return a percentage or interest that varies according to the currency in which they choose to invest and which in many cases can be more favorable than keeping their money in a centralized financial institution in the form of savings or CDT.

However, not only on interest depends on the profit that the user makes, but also on the volatility of the cryptocurrency. In this case, what some experts usually recommend is to be inclined to invest in the most popular cryptocurrencies, since the newer they are, the more likely they are to be volatile. Likewise, another aspect that adds to the equation has to do with the annual percentage yield (APY) that they generate, because if, for example, for every 100 dollars a currency generates a return of 18.34% per year, this means that in a month the profit corresponds to 1.52 dollars.

While staking has become one of the options that users use to earn money passively, there are several ways to make money. In this sense, before opting for this type of investment, it is important to consider the security offered by exchanges or virtual platforms for buying and selling cryptocurrencies, because when these platforms offer the 'staking' service, they support the investment through a network of systems that also support a large variety of digital currencies and tokens.

In that order of ideas, within the landscape of 'staking' we will find the traditional or Proof of Stake (Pos). This is perhaps the most popular modality, as it allows users to block a deposit that, as an escrow fund, guarantees the operation of the blockchain.

The second type of staking that the user can opt for is delegated proof of stake (DPoS), whereby the owner of the funds cedes the voting power that their assets give to others to make decisions about the future of the project. Generally, this is done with a pre-established amount of cryptocurrencies and those to whom voting power was delegated, subsequently share the rewards among those who backed it.

Thirdly, there is the option of opting for Pool Staking, a modality that, being similar to traditional staking, differs in terms of the possibility of choosing the cryptocurrency that the user wants to support. Likewise, it involves a group of coin holders who pool all their resources in order to increase their chances of validating blocks and receiving rewards, since large taxpayers are more in demand within the network for mining efficiency and effectiveness purposes. In that sense, Binace experts say that joining a staking group instead of doing it alone can be ideal for newer users.

This range of options, according to Bryan Benson, Chief Operating Officer of Binance Latin America, allows users to create their “own criteria, choose the system that best suits their needs and derive profits by putting their funds under collateral, rather than taking risks. We could say that this works in a similar way to savings accounts in traditional banks, only the big difference is that everything is backed by blockchain technology, which allows greater flexibility in personal finance.”

Therefore, regardless of the currency or token that is going to be used for this purpose, the truth is that exchange is one of the factors that has the greatest impact on return, since it is not only a profit that is obtained, but also the possibility of subsequently using it in other services that will eventually allow to generate a return that is at the same time easily interchangeable if required as a physical exchange currency.

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