Everything you need to know about Crypto Staking
Staking and Proof-of-Stake are two terms (more about all crypto terms you need to know here) you’ll come across a lot in the world of crypto currencies. Below is a summary of the main characteristics:
What is Staking
Staking is the process by which a token holder of an underlying asset receives income in the form of Staking rewards. Before you can receive rewards, you first need to have purchased a token which supports Staking. These generally are tokens which utilise a consensus mechanism called Proof-of-Stake (PoS).
Proof-of-Stake as a concept, is a type of consensus mechanism used by blockchain networks to achieve distributed consensus. Distributed consensus is a procedure performed by a consensus algorithm, with the goal of reaching a common agreement in a distributed or decentralized multi-agent platform. Essentially, a consensus mechanism allows distributed systems such as computers, to work together and stay secure.
Staking has similarities to borrowing in the legacy finance world of fiat currencies and interest rates. Historically, you deposit fiat currency and in return receive a fixed or floating interest rate measured on an annualised basis, and applied on a daily basis.
Token holders have the option of running their own node (to help secure the network), or delegating their voting weight to a validating node of their choice. Therefore, putting their stake to work.
How does the staking process work?
Each validator, which contributes to the safety and maintenance of the network in a PoS blockchain, must own a minimum amount of tokens and contribute to verifying transactions on the blockchain among others.
Rewards are distributed when a validator ultimately confirms a new block using its voting weight. Rewards will be predetermined, but may vary depending on many variables such as efficiency, honesty, downtime and voting weight to mention a few.
Staking provides a financial incentive to help attract token holders and enhance the security of the network by the amount of distributed nodes. A Node is the system that ensures the rules of the network are adhered to and help other nodes in the network operate honestly.
For example, if a node tries to insert a fraudulent transaction into a block, such as a double spend, other nodes in the same network will refuse to accept the fraudulent transaction. The fraudulent node will stop working to validate new blocks and be penalised for bad-acting.
In many PoS networks, a node that attempts to broadcast fraudulent transactions loses all coins that it staked.
Staking pools, how do they work?
Staking pools come into play when Proof-of-Stake networks need large amounts of coins that are staked in order to qualify to validate new blocks.
Benefits of Staking with cryptocurrency
Staking has a number of advantages for people who validate blocks, for example:
- It eliminates the need to invest in expensive mining equipment, such as ASICs or high-end GPUs, associated with Proof-of-Work (PoW) systems. These systems are ultimately extremely wasteful, and do significant damage to the environment.
- You can buy crypto tokens and lock (stake) them in your wallet instead of buying equipment for mining. This leads to value growth.
- The value of cryptocoins deployed via staking generally will not depreciate as time moves forward (due to the law of supply and demand and, Total-Value-Locked or amount of coins under stake). Although, fluctuations in the asset prices affect the value of the stake.
- Proof-of-Stake is more environmentally friendly and energy efficient than the PoW algorithm used in the Bitcoin network, for example.
- Stake guarantees you a predictable source of income.
- There is no (technical) knowledge required to participate in staking.
The disadvantage of staking is that the underlying asset may have an unlock period of days or weeks before you will be able to remove your stake from the pool. PoS is also a relatively new concept and hasn’t been battle tested over a decade like PoW.
How much do you earn on staking?
Reward rates for staking depend on several factors. You can, before you start staking, calculate your anticipated return on investment using calculators. Each crypto currency has its own rules and rates.
Ready to start staking?
Often all you need to do is buy a particular cryptocurrency and download a wallet application on a laptop, PC or Smartphone.
Prominent coins which currently stake are, Tezos (XTZ), Algorand (ALGO), Ethereum 2.0 (ETH), Cardano (ADA), Polkadot (DOT, Kusama (KSM), VeChain (VET).
Brickken’s own utility token BKN will have a staking mechanism. Read our whitepaper to learn more!