Put simply, staking involves locking up a portion of your crypto to support the security of the network in return for rewards. Cryptocurrencies that offer staking utilize the “Proof of Stake” consensus mechanism, a method used to verify transactions without the need for a centralized intermediary. It’s a much less energy-intensive alternative to Proof of Work. Staking is a way of earning passive income on crypto, but first, it’s important to understand how it works.
What is Proof of Stake (PoS)?
To better understand staking, you’ll need to learn how Proof of Stake (PoS) works.
Proof of Work (PoW) vs Proof of Stake
Proof of Stake is a newer consensus mechanism that aims to increase speed and efficiency and offer lower fees than Proof of Work. Proof of Work is energy-intensive and involves a lot of arbitrary computational work. The mathematical problems that the miners compete to solve serve no purpose other than maintaining the network’s security. PoS offers an alternative that allows blockchains to operate in a more energy-efficient way while ensuring security and decentralization are maintained. The difference between PoW and PoS is that instead of anyone being able to validate transactions, validators must first stake their tokens to be eligible to validate. PoS is much more energy-efficient, cost-effective, and scalable.
How does Proof of Stake work?
While the exact method varies depending on the blockchain, the idea is that users can lock their coins in a staking contract to secure the network, and earn a fee from every transaction they validate. Each user is rewarded in proportion to their stake. PoS validators are further incentivized by their own stake (coin holding) as if network security is not effectively maintained, they may lose their stake. On Cosmos, for example, users can stake their ATOM tokens, and in return, operate a Validator’s node. As a reward for staking their tokens, they earn a percentage of every transaction that’s processed. A nice addition that Cosmos has implemented for security purposes is that if nodes are found to be acting dishonestly they are penalised and lose their tokens. Note: as not all cryptocurrencies use “Proof of Stake,” not all cryptocurrencies offer staking. Some other cryptocurrencies that offer staking include: Ethereum, Polkadot, and Solana.
What is a staking pool?
A staking pool is a group of stakeholders who combine their coins and proportionally share their rewards. Staking pools offer an added level of flexibility for individual participants and lower the entry barrier. Often, a coin has to be staked for a specific period of time, and there may be a minimum balance required to stake. Typically, staking pools do not enforce specific withdrawal times and require a low minimum balance.
How to stake
Check out our crypto school tutorials for more on how to stake. Coinbase: is a centralized exchange that allows users to stake their crypto by contributing to a staking pool. Find out how in our Coinbase tutorial. Sushiswap: is a decentralized exchange where users can exchange and borrow tokens and earn yield through staking, providing liquidity or lending. Read our tutorial on How to Earn a Yield on Sushiswap here. Lido: is a decentralized application that allows users to earn yield. Read our Lido Staking Tutorial here. Note that most staking pools charge a % fee.
Risks of staking
It is important to note that staking is not without risk. Staking often requires a lockup period, where crypto can’t be transferred for a defined period of time. This means that staked tokens can’t be traded even if prices change. Before staking, it’s vital to research the staking requirements for each project.
