What is Staking

What is Staking

Knowledgebase
26/04/2021 by Koinal
379
Staking is one of the several ways of earning some additional cryptocurrency in a blockchain.
What is Staking

To put it quite simply, it is the act of locking your assets in your crypto wallet in a Proof of Stake (PoS) blockchain to support the blockchain network’s operations. By not spending or transferring any of your cryptocurrency for a certain period, you actively contribute to the process of transaction validation on a PoS blockchain.

Sunny King and Scott Nadal introduced the idea of staking and the PoS mechanism in 2012. The PoS mechanism has been developed as an alternative to the mining method of Proof of Work. While the mining method requires special devices and high electric power consumption, for staking you only need a minimum required balance of the cryptocurrency accepted on that particular blockchain. Another advantage of staking is that it reduces the circulated cryptocurrency amount and thus stimulates the demand, which will possibly increase the currency value.

The users who participate in staking are called “validators” since they contribute to the validation process. They earn rewards in return for their service. The users who stake higher amounts of the coin are more likely to be chosen as the next block validator. Every PoS blockchain has its staking cryptocurrency and its own set of rules: technical requirements, minimum-required stake size, the procedure of selecting validators, the algorithms of reward mechanisms, penalties, etc.

Validators are expected to have stable stakes and secure services. If they intervene in malicious behavior (such as double-signing and attack attempts), they lose some part of their stake size.

Some blockchains require more extended periods of staking which means that you cannot use your assets for a significant amount of time. In this case, a staking pool is a good option. The validators in staking pools develop and manage a single system of a specific type of cryptocurrency. The owners, who do not prefer to lock their assets, delegate some part of their coins to those validators and the pool performs all the work. Another advantage of staking pool is that they are more likely to earn higher rewards since the total amount is significantly more significant than that of an individual user. The block reward is distributed among the delegators in direct proportion to their initial contribution. The staking pool managers keep a specific part of the block rewards to themselves in return for their work.

Staking is a method that has gained attention over the last year in parallel with the increasing popularity of the PoS mechanism. There is a variety of service providers and one should wisely decide on how to start staking and which coin to bet. The expectations of the blockchain protocol, minimum-required staking amount, lockup period, technical requirements are among the many factors to keep in mind at the decision-making phase.

Lending is another “passive” method to earn cryptocurrency and the development in the lending/borrowing market is claimed to be a new attraction for cryptocurrency holders. While the prospective validators should make their assessments wisely, the dynamic staking market gives promising signs for further growth.

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