More than digital gold: how bitcoin “steaking” works and why it’s needed
Bitcoin is often referred to as “digital gold” because of its role as a store of value and limited supply. However, in recent years, new concepts and technologies have emerged that promise to complement or extend bitcoin’s functionality. One such concept is bitcoin steaking. Although steaking is not part of the original bitcoin protocol, there are innovative approaches that allow its principles to be applied to bitcoin.
1. What is steaking?
Staking is the process of locking a cryptocurrency into a network to support its transactions and rewards. It is usually associated with a consensus Proof of Stake (PoS) algorithm where users, by freezing their tokens, help support the network and verify transactions.
The main aspects of staking:
- Token locking: Users freeze their tokens in a dedicated wallet or platform.
- Network Support: These frozen tokens are used to verify transactions and secure the network.
- Rewards: Users are rewarded with additional tokens for supporting the network.
2. Bitcoin Stacking: concept and implementation
Although the original bitcoin uses Proof of Work (PoW) rather than PoS, there are methods and projects that apply the concept of steaking to bitcoin:
2.1 Stacking at the second-level level
- Second-level solutions: Solutions such as the Lightning Network offer ways to use bitcoin for steaking. For example, users can freeze their funds in Lightning Channels to receive rewards for conducting transactions through the network.
2.2 Platforms and protocols
- Stacking Platforms: Some platforms and protocols, such as Rasberry Pi, allow users to freeze their bitcoins to support networks and receive rewards in the equivalent of other tokens.
- Decentralised Finance (DeFi): In DeFi applications, it is possible to use bitcoins as collateral to receive rewards as part of staking other assets.
3. Why is bitcoin steaking needed?
3.1 Increased Yield
- Interest rewards: Staking can provide additional returns in the form of interest, making bitcoin investing more profitable.
3.2 Network Support
- Improved Scalability: The use of steaking at the second layer level or through protocols can help improve the scalability and performance of the bitcoin network.
3.3 Participating in DeFi
- Interaction with DeFi: Bitcoin steaking can enable participation in various DeFi applications and protocols, extending the functionality of the assets.
4. Risks and Challenges
4.1 Technical Risks
- Security: Staking via third-party platforms can pose security risks. Validated and trusted platforms should be carefully selected.
4.2 Volatility
- Price fluctuations: Staking does not protect against bitcoin price volatility, which may affect the overall return on investment.
4.3. Liquidity
- Availability of funds: Freezing bitcoins may limit their liquidity and availability for quick transactions.
5. How to start bitcoin steaking
5.1 Choosing a platform
- Research platforms: Find platforms and protocols that offer steaking for bitcoin or related assets.
5.2 Connecting a wallet
- WalletSetup: Connect your bitcoin wallet to a steaking platform by following the platform’s instructions.
5.3 Asset Management
- Monitoring and Management: Regularly check the status of your steaked bitcoins and rewards, and keep track of changes in the steaking terms.
Conclusion
Although steaking is not traditional for bitcoin, modern technology and platforms allow the concept of steaking to be applied to this asset. Bitcoin steaking can offer new opportunities to increase returns and participate in new financial ecosystems. However, it is important to consider the risks and carefully select steaking platforms and protocols to maximise the benefits and minimise potential losses.