Staking involves keeping cryptocurrencies in a wallet or exchange to help maintain blockchain operations and receive rewards in return. Cosmos uses a combination Proof-of-Stake system to tackle scalability and interoperability problems in the blockchain industry.
Cosmos is a distinct blockchain run by its own currency, Atom, with the goal of connecting multiple blockchains into a single network known as the Cosmos Hub. Staking Cosmos is a popular method for Atom holders to receive additional cryptocurrencies without making an investment.
What is Cosmos (ATOM)?
Cosmos is a collection of interlinked blockchains developed by Tendermint Inc. with the goal of creating a unified, next-generation internet model. It represents a model for the Internet of Blockchains (IoB).
The two key elements that facilitate staking in Cosmos are the Tendermint core, an open-source platform for building blockchain projects, and the Inter-Blockchain Communication (IBC) algorithm, a protocol that connects various blockchains within a cluster, serving as the central hub. The blockchains in the cluster operate independently while maintaining a shared structure.
The Tendermint core provides the underlying infrastructure for developers to create and launch their own blockchain projects. At the same time, the IBC algorithm allows for seamless communication and transfer of data between the various blockchains in the cluster. This allows for greater scalability, interoperability, and security within the Cosmos network.
The Cosmos project aims to bring unity to the fragmented blockchain space, allowing for a more interconnected and harmonious ecosystem of blockchains.
The system consists of various blockchains, referred to as zones, that are linked to a central hub. The central hub operates the proof-of-stake algorithm to keep everything in sync. The zones comprise multiple hubs responsible for verifying and consolidating transactions, and the proof-of-stake system is configured to support the hubs.
What is the Reason for Staking Cosmos?
For consensus to be established, ATOM holders voluntarily surrender their tokens to verify transactions. The Atom holders collectively select a group of validators to construct the next block on the Cosmos blockchain, and these validators are compensated with Atoms for their efforts.
Rather than becoming validators themselves, Atom holders delegate their assets to a trusted validator. This act of delegation serves as a vote for who should be among the validators and allows Atom holders to participate indirectly in the validation process.
As a reward for validating transactions on the network, Atom holders can receive a commission of up to 10%. The top 125 Atom holders with the largest delegation of Atoms become validators. The Atom holder retains full ownership of their delegated Atoms, but they cannot be utilized for transactions.
Validators can choose either to compound or cash in their Atom rewards to claim them. Compounding involves reinvesting the newly acquired Atoms to boost rewards, similar to reinvesting profits for more profit.
On the contrary, cashing in involves retrieving the Atoms generated from delegation, thus making them available for use in transactions.
It is important to note that compounding helps increase rewards faster, but cashing in provides immediate access to the Atoms. The choice between compounding or cashing in depends on the individual’s financial goals and risk tolerance.
How to Stake Cosmos (ATOM)
To stake in Cosmos, the process is straightforward and requires a few basic steps. A Ledger wallet makes it even easier, but it can also be done through the Cosmostation mobile app.
First, you must set up a wallet where your Atoms will be stored, which can be done through Ledger, MyEtherWallet, or the Cosmostation mobile app. This wallet will be used for transactions and delegating tokens for validation.
Before staking, make sure your wallet is backed up, and you have securely stored your seed phrase, which is a list of words that hold all the information needed to access your tokens from the wallet. The wallet software generates the seed phrase.
Once you have set up and added funds to your wallet, you can assign your Atoms to validators and begin receiving rewards. The process is straightforward, although the methods for delegation may vary slightly depending on the wallet you use.
Token holders can delegate their Atoms to a single validator or distribute them among multiple validators for increased diversity.
Request Your Payment
Your commission earnings may not automatically be sent to your wallet, and you may need to request for it. It’s recommended to do this frequently to enhance the compounding effect of your atoms.
Benefits of Staking ATOM
Staking is only appealing when the commission received is higher than the increase in value or profits from trading the coin.
- Not taking advantage of staking is seen as missing out on a chance to earn revenue. ATOM holders who don’t delegate their coins to validators miss out on commission payments from profits.
- Holding many cryptocurrencies increases the chances of being chosen as a validator, allowing verification of new blocks on the blockchain network.
- Staked cryptocurrencies retain their value, unlike mining equipment that becomes outdated when newer and better equipment is released.
- Staking generates transaction fee income as each block’s transaction fees are paid to the token holder. Thus, staking provides multiple sources of income and helps to maintain the stability of the cryptocurrency value over time.
When thinking about staking, the following should be kept in mind:
- Conduct extensive research on the cryptocurrency, platform, and validators you plan to stake with.
- Establish an expected yield before starting to stake.
- Choose a reliable cryptocurrency that is likely to provide better returns.
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