Staking is a blockchain-based service that enables you to earn extra crypto by locking up your existing holdings. Similar to interest models in traditional finance, staking returns vary depending on how long you lock your funds up for. Staking pays rewards because the act of staking contributes towards a vital part of the blockchain network.
This article aims to increase your understanding of staking by covering the following topics:
How does crypto staking work?
Staking is a mandatory condition of blockchains that operate using the Proof-of-Stake (PoS) consensus mechanism. This particular consensus mechanism relies on individuals to become validators by staking tokens. Validators are given the voting rights for the governance of the network and are essential for processing transactions on the network.
Networks view a stake as a commitment to the network. Those that financially stake are incentivized to behave properly and maintain the integrity of the network because bad actors could diminish the value of their stake.
Transaction validators are chosen differently depending on the network you’re looking at. Most networks give more preference to those with higher stakes. This is because they view larger stakes as more committed.
Proof-of-Work (PoW) is an alternative consensus mechanism to PoS. PoW is well known because it was the first cryptocurrency consensus mechanism and powers the most famous crypto of all - Bitcoin. PoS was created to try and upgrade PoW, aiming to reduce energy usage and increase network scalability. The arguments about the best consensus mechanism still rage today.
There are also modified versions of PoS, such as Delegated Proof of Stake (DPoS). DPoS assigns starkers voting power based on the proportion of tokens they are staking. The higher the stake, the more power they get. Staker's vote to elect delegates who are then responsible for managing the blockchain and maintaining consensus. Delegates receive rewards for their work, part of which is distributed to the stakers.
Within some networks, staking can be used to show your commitment to the network and grant you other permissions. For example, staking can be used to reach a decentralized decision on game balance by giving token takes the opportunity to vote whether something should be changed or not.
The benefits of staking
Here are the core benefits of staking:
Increased security and stability of the blockchain
Staking contributes to the continuity of the blockchain you support. The success of a PoS blockchain relies on decentralized contribution. Apart from fulfilling the use case of the token, staking is an avenue for the user to support the growth of distributed ledger technology.
Reduce energy usage
PoW reportedly uses large amounts of power to keep the network running. Consensus alternatives like PoS aim to achieve consensus in a more energy-efficient way.