What is Crypto Staking?

Image Credit: SoFi

The concept of staking in cryptocurrency can be traced back to the early days of Bitcoin and other proof-of-work (PoW) cryptocurrencies. These networks used a consensus mechanism that required users to contribute computational power to validate new transactions and create new blocks on the blockchain. This process is known as mining, and it is the foundation of PoW cryptocurrencies.

However, as the popularity of these cryptocurrencies grew, so too did the difficulty of mining. As more and more miners joined the network, it became increasingly difficult to earn rewards through mining. Additionally, the energy consumption required to mine Bitcoin and other PoW cryptocurrencies became a major concern.

In order to address these issues, several projects began experimenting with alternative consensus mechanisms, such as proof-of-stake (PoS). In a PoS system, instead of miners contributing computational power to the network, they "stake" their cryptocurrency by holding a certain amount in a locked wallet. The more cryptocurrency a user holds and stakes, the greater their chances of being chosen to validate new blocks and earn rewards.

The first cryptocurrencies that implemented a pure Proof of Stake (PoS) mechanism was Peercoin and Blackcoin in 2013. Followed by NXT and Shadowcoin in 2013, Blackcoin was the first coin to implement pure PoS .

Since then, many other projects have adopted PoS or a variation of it, such as Delegated Proof of Stake (DPoS) . This included Ethereum which is planning on moving from a proof-of-work to a proof-of-stake consensus mechanism in its upcoming upgrade (Eth 2.0).

As more and more projects adopt PoS, staking has become a popular way for users to earn rewards on their cryptocurrency holdings while also supporting the network.

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What is Crypto Staking?

Crypto staking is the process of holding a certain amount of cryptocurrency in a wallet for a specific period of time in order to support the network and earn interest on the stake. This process is often used for proof-of-stake (PoS) cryptocurrencies, which use a consensus mechanism that is based on the amount of cryptocurrency that a user holds and stakes, rather than on the computational power they contribute to the network (as is the case with proof-of-work, or PoW, cryptocurrencies like Bitcoin). When a user stakes their cryptocurrency, they are essentially holding it in a locked account and using it to help validate new blocks on the blockchain. In return, they receive a reward in the form of new cryptocurrency.

What Cryptocurrencies Allow Staking?

There are many cryptocurrencies that allow staking. Some of the more popular ones include:

1. Ethereum 2.0: Ethereum's upcoming upgrade to a proof-of-stake consensus mechanism will allow users to stake their ETH in order to validate new blocks on the network.
2. Cosmos (ATOM): A decentralized network of independent parallel blockchains, built on the Tendermint protocol.
3. Tezos (XTZ): A self-amending cryptographic ledger, which uses a formal process to implement network upgrades.
4. Cardano (ADA): A proof-of-stake blockchain platform that aims to deliver more advanced smart contracts than any protocol previously developed.
5. Polkadot (DOT) : A multichain protocol that enables cross-blockchain transfers of any type of data or asset.
6. Algorand (ALGO) : A decentralized, open-source blockchain protocol that can handle high throughput and supports the development of a wide range of applications.
7. EOS : EOS is decentralized system that enables the deployment of industrial-scale decentralized applications through a decentralized autonomous corporation (DAC) model.

These are only examples, there many more like these that allows staking, with new ones popping up regularly.

It is important to note that, some crypto allows staking via Delegated Proof of Stake (DPoS) mechanism. In this mechanism, users can delegate their staked tokens to elected block validators. It allows users to earn rewards on their staked tokens without needing to run a validator node themselves.

Read More: What Is Crypto Mining?

How does Staking Work?

Staking works by requiring users to lock up a certain amount of cryptocurrency in a wallet for a specific period of time, in exchange for the opportunity to validate new transactions and earn rewards. This process is known as "staking" because users are essentially "staking" their cryptocurrency to support the network.

The specifics of how staking works will vary depending on the specific cryptocurrency and its consensus mechanism, but in general, the process can be broken down into a few key steps:

• A user must first acquire the cryptocurrency that they wish to stake.
• Next, the user must hold that cryptocurrency in a wallet that supports staking. This could be a hardware wallet, a software wallet, or a special staking wallet provided by the cryptocurrency's developers.
• Once the cryptocurrency is held in a staking-compatible wallet, the user can begin the process of staking by "staking their coins."
• Once staked, the user's wallet will begin to participate in the consensus mechanism of the blockchain. Depending on the blockchain, there are different ways to participate, but the general idea is the same: Users vote on the next block to be added to the chain by putting their coins on the block they agree on.
• If the block that the user voted on is included in the blockchain, the user will earn a reward, typically in the form of new cryptocurrency.
• The process repeats every time a new block is created, and the user can earn more rewards depending on the number of coins they staked and the consensus mechanism.

It's worth noting that the specifics of staking can vary greatly from coin to coin and it's important to research the specifics of each coin before you decide to stake. Additionally, the rewards for staking, the lock-up period, the staking minimums also differ, and these are important to consider when choosing which coin to stake.

How do You Stake Cryptocurrency?

The process of staking cryptocurrency will vary depending on the specific cryptocurrency and the staking method it uses, but in general, the process can be broken down into a few key steps:

• Acquire the cryptocurrency that you want to stake: You will need to purchase the cryptocurrency you want to stake on an exchange or from someone who already owns it.
• Choose a staking wallet: You will need a wallet that supports staking for the specific cryptocurrency you have chosen. Hardware wallets, software wallets, or special staking wallets provided by the cryptocurrency's developers are all options.
• Move your cryptocurrency to the staking wallet: Once you have your staking-compatible wallet set up, you can move your cryptocurrency from your exchange or other wallet into your staking wallet.
• Configure your staking settings: Depending on the wallet, you may need to configure your staking settings by specifying the number of coins you want to stake, and any other relevant settings.
• Begin staking: Once your coins are in your staking wallet and your settings are configured, you can begin the process of staking by "staking your coins." This will typically involve confirming the staking process on your wallet and waiting for the network to confirm your staked coins.
• Wait for rewards: Once your coins are staked, you will begin to participate in the consensus mechanism of the blockchain. If the block that you participated in is included in the blockchain, you will earn a reward, typically in the form of new cryptocurrency. The rewards usually distributed periodically, it could be daily, weekly or monthly.

It is important to note that, in some cases, some cryptocurrency may require an additional step like delegating to a staking pool, or choosing to delegate to a validator. This will require additional research on the specifics of the cryptocurrency you're choosing to stake, as well as the specifics of the staking process.

What Kind of Returns does Staking Offer?

The returns from staking can vary depending on a variety of factors, such as the specific cryptocurrency, the current interest rate in the coin, the total supply of coin, the number of coins being staked in comparison to the total supply, and the overall health of the network.

In general, returns from staking tend to be lower than returns from trading or investing, but staking can be a more passive and consistent way to earn rewards on your cryptocurrency holdings.

The returns on staking also differ from coin to coin, for example some of the cryptocurrency may offer an annual percentage yield (APY) of around 2-3%, while others can offer as high as 20%. It's important to research the expected returns of a coin before choosing to stake it, this can be found on the coin's website, social media, or by looking at block explorers.

It's worth noting that the returns on staking can be affected by inflation, as the reward per block may decrease over time as more and more coins are staked, which will decrease the return on stake. However, this is compensated by the steady increase in the value of the coin. Also, the returns on staking can be affected by a drop in the value of the coin, making the returns less attractive.

It's also important to keep in mind that staking is a long-term investment strategy and requires a bit more patience and research. Staking can also be a good way to earn rewards on your cryptocurrency holdings while supporting the network, and it can be a more consistent way to earn rewards than other investment strategies like trading or mining.