What is Staking? A Full Guide

Making money in the crypto universe isn’t just about trading or mining. There are other ways to generate income, notably staking. Staking allows holders of cryptocurrencies whose blockchain uses the proof of stake (PoS) mechanism to earn money. If you want to grow your money while being environmentally friendly, crypto staking is ideal. Follow along in this article to fully grasp its functioning, its advantages, and the potential profits of this very interesting activity.

What is Staking?

It’s a method that enables crypto holders within a Proof-of-Stake blockchain to lock their tokens to support the network and validate transactions. In return, they receive rewards in the form of additional tokens.

In other words, imagine making a financial investment. Your money is locked for a determined period in exchange for interest. Staking works similarly. A holder of crypto tokens locks their assets to participate in transaction validation and the creation of new blocks on a blockchain. In exchange for their work, they receive tokens, which are essentially interest.

Staking contributes to the security and decentralization of blockchains because it incentivizes participants to act honestly. One of the most well-known PoS networks is Ethereum 2.0.

How to Stake?

1. Choose a cryptocurrency compatible with staking;
2. Purchase the digital currency of your choice to have the minimum required number of tokens;
3. Transfer your tokens to a wallet compatible with staking;
4. Choose the staking method: you can become a staker by becoming a validation node, participate through an exchange platform like Binance or Coinbase, or join a staking pool;
5. Lock your funds;
6. Receive your rewards in crypto.

Staking on renowned platforms like Binance often offers attractive returns, making staking an appealing choice for those seeking a long-term investment.

Different Forms of Staking?

Staking can come in various forms. Let’s explore together some of the most common forms in the cryptocurrency world:

• Simple or Direct Staking: Here, staking works as follows: crypto holders lock their tokens in a wallet to support operations on a blockchain network, such as transaction validation. In return, they receive rewards, often in the form of additional tokens. This is the most basic form;
• Staking via Staking Pools: Here, token holders join a staking pool. These pools allow those who do not possess enough tokens to stake by themselves to pool their resources. Rewards are then shared among pool participants proportionally to their contribution;
• Delegated Staking (DPoS): Users delegate their tokens to a specific validator (or node) without actually transferring them. This system is often used in networks that utilize Proof of Stake (PoS) or its variants. Delegated validators are responsible for network maintenance, and token holders receive a portion of the rewards obtained by these validators;
• Staking on DeFi Platforms: Some DeFi platforms offer staking options, where users can stake tokens to provide liquidity and receive rewards, usually in the form of governance tokens or interests;
• Staking with Cash or Stablecoin Rewards: Here, rewards offered by the platform are not additional tokens but cash or stablecoin rewards. For those concerned about volatility, this is the most ideal form;
• NFT-Linked Staking: In some ecosystems, token staking can be linked to the ownership or acquisition of non-fungible tokens (NFTs). Rewards may also include unique NFTs or rights to access specific services or products;
• Staking with Special Conditions or Extended Lockups: Some protocols offer high rewards or additional benefits for those willing to lock their tokens for an extended period.

Each of these methods has its own advantages. But they also present different levels of risk, reward, and commitment. It is thus important for investors to understand the specifics of each method before diving in.

In What Type of Blockchain is Staking Used?

Staking is a method used in Proof of Stake (PoS) type blockchains and its variants, such as Delegated Proof of Stake (DPoS) or Proof of Authority (PoA).

Here are some blockchains that currently offer staking:

• Ethereum 2.0 (ETH);
• Solana (SOL);
• Cardano (ADA);
• Polkadot (DOT);
• Avalanche (AVAX);
• Polygon (MATIC);
• Cosmos (ATOM);
• VeChain (VET);
• Tezos (XTZ).

Unlike the proof of work (PoW) used by Bitcoin, PoS aims to reduce the energy expenditure associated with maintaining the blockchain while ensuring adequate security and better scalability.

Thus, to participate in blockchain governance, it is no longer necessary to invest in expensive computer hardware. Users simply need to lock a certain number of virtual currencies in a smart contract. In return, they receive rewards in the form of crypto tokens as well as governance power. They are then called “stakers.”

How Does Staking Work?

Here’s how staking works:

1. Digital asset holders lock a portion of their holdings in a smart contract, called “staking,” to participate in transaction validation. In the case of Ethereum, for example, users must lock 32 ETH;
2. Validators are selected based on the amount of crypto they have staked;
3. They validate transactions and create a new block;
4. With each validated block, the staker receives newly created crypto tokens, as well as transaction fees in exchange for their services;
5. If a validator behaves maliciously, they can lose a portion of their stake.

Staking is a practice that exists only in blockchains using Proof of Stake. The latter is a consensus mechanism that emerged in 2012 and relies on the deposit of collateral to function. On most stake-based blockchains, returns are often proportional to the amount invested, as well as the governance share.

Advantages of Staking

Staking offers numerous advantages, both for cryptocurrency holders and for the blockchain network. Here are some staking advantages:

For Cryptocurrency Holders:

• Passive Income Generation: Staking on reputable platforms offers not only attractive returns but also an efficient way to participate in the network’s growth;
• Increase in the value of their holdings;
• Participation in blockchain network governance.

For Blockchain Networks:

• Network Security Enhancement through Validator Incentives;
• Reduction in Hash Power Concentration Compared to Proof of Work;
• Encouragement of Participation from Digital Currency Holders;

Disadvantages of Staking

There are also disadvantages for the blockchain and risks for cryptocurrency holders. Here are the disadvantages of staking:

For Cryptocurrency Holders:

• Funds Lockup that cannot be quickly utilized;
• Risk of loss of stake in case of malicious behavior.

For Blockchain Networks:

• Risk of Centralization around Large Cryptocurrency Holders;
• Need for Security Mechanisms to Prevent “51% Attack”.

Why Can’t Some Cryptocurrencies Be Staked?

Investing in crypto staking can be a lucrative strategy. However, it’s important to note that not all cryptocurrencies are eligible for this practice. Let’s explore together some key reasons why certain digital currencies cannot be staked:

• Consensus Mechanism: Some cryptocurrencies operate on other consensus mechanisms such as Proof-of-Work (PoW), which are not compatible with staking. Staking is typically associated with mechanisms like Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS);
• Technical Design: The ability to stake often depends on the technical design of the blockchain. If the underlying structure does not support staking, it cannot be implemented;
• Deliberate Developer Choices: Developers of a cryptocurrency may deliberately choose not to include the staking function. This can be motivated by security, governance, or other project-specific concerns;
• Crypto Volatility: Staking often involves a temporary freeze of funds. Thus, some cryptocurrencies designed to be highly volatile may not be attractive to those seeking constant liquidity;
• Project Youth: Newer or still-developing projects may not have yet integrated staking features. Sometimes development teams choose to add this functionality at a later stage.

Understanding these specific aspects is essential for investors looking to explore staking. Before investing, it’s recommended to review the characteristics unique to each cryptocurrency to determine if staking is possible.

Conclusion

In conclusion, if you hold cryptocurrencies, getting started with staking is a fascinating method to generate passive income while contributing to the security and decentralization of PoS blockchain networks. Although it has undeniable advantages, it’s important to consider potential disadvantages. With a constant growth in the number of stake-based blockchains offering this opportunity, staking continues to evolve. It also plays a crucial role in the crypto ecosystem, offering investors an eco-friendly way to grow their money.

La Rédaction C.

L'équipe éditoriale de Cointribune unit ses voix pour s’exprimer sur des thématiques propres aux cryptomonnaies, à l'investissement, au métaverse et aux NFT, tout en s’efforçant de répondre au mieux à vos interrogations.