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What are Staking, Cloud Mining, and Masternodes in cryptocurrency?

Updated on :  

08 min read.

Let us understand about the concept of Staking, Cloud Mining and Masternodes in cryptoworld.

Latest updates Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.
2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

Union Budget 2022 Outcome:

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.
2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.
3. Loss from digital assets cannot be set-off against any other income.
4. Gifting of digital assets will attract tax in the hands of receiver.Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

What is Staking Cryptocurrency?

Earning rewards by holding cryptocurrencies is a simple definition of staking. Let us know the concept of staking more in detail.

Staking is a process where the participants of cryptocurrency buy and set aside a certain amount of tokens. If the participant holds the tokens as per the procedure indicated by the developers of that particular network, a block is created. It means, by simply holding a certain number of tokens, the participant becomes a validator of the transactions made through the blockchain. The ‘validators’ or ‘stakers’ are then tasked with processing transactions, adding blocks, and storing information. 

This mechanism is known as Proof-of-Stake (POS.). This type of validation involves less use of mining equipment to keep the blockchain network secure. Many cryptocurrency protocol developers are expected to switch from a model known as proof-of-work (PoW) to proof-of-stake because PoW requires the participants to purchase and run the mining equipment. Switching to PoS will dramatically reduce the energy requirements for validating the transactions. Just by holding coins, the stakeholders are offered interest in the staked holdings. The interest rate may vary from network to network, based on the demand and supply factors.

PoW and PoS are consensus-based protocols. Instead of depending on third parties mediators for crypto transactions, such as a financial institution, the member nodes in the blockchain use a consensus protocol to ensure the integrity of the transactions. The consensus can be agreed upon based on the ledger details, digital signatures and cryptographic hash functions.

What is a Masternode?

Masternode is another way of earning cryptocurrency. Let us understand in detail how does it work-

The masternodes are substantially different from the other normal nodes. Computers that connect to a cryptocurrency network are nodes. It supports the validation and relaying of transactions. Each node of the blockchain network has a copy of the whole blockchain. So every transaction is known by each node. When a transaction happens, the node creating the transaction transmits the details of it using encryption. The nodes that perform all the rules of cryptocurrency are known as full nodes. 

However, masternodes are slightly advanced than full nodes. They perform all the advanced functions that are crucial for the blockchain network. Hence, masternodes have numerous unique features that are not available from ordinary nodes. The features include:

  • Instant transactions,
  • Privacy in transactions,
  • Participation in governance and voting

The Masternode of one cryptocurrency network is different from another. They are unique and different in functionality.

However, those who run masternodes are rewarded once per day or even several times per day. Each project functions differently. If you select the right coin, running a project can be very profitable.

What is Cloud Mining?

Crypto mining is a sequence of processes designed by the networks to secure a given blockchain network. You pay the third-party cloud provider to buy or maintain special mining rigs and run a blockchain node in cloud mining. Cloud computing power is used to mine cryptocurrencies. The miners add a new block of transactions to the blockchain by solving complex computational math problems and ensuring that those transactions are accurate. Such a method is ideal for those participants who do not want to engage in the technicalities of crypto mining. 

It has many advantages and disadvantages. The advantage of the user is he has just to outsource the work and does not have to buy the computer equipment, maintain and deal with the heat and noise. However, the disadvantage is that the user is not in control of the equipment, there is no know-how of its usage, and there can be a high rate of scams in the cloud mining sector.

However, the user receives the rewards associated with the mining equipment.

Related Articles

https://cleartax.in/s/cryptocurrency-taxation-guide

https://cleartax.in/s/nft-non-fungible-token

https://cleartax.in/s/cryptocurrency-intraday-and-arbitrage-trading

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