The concept of staking in crypto can be as intricate or straightforward as one desires, contingent on the depth of understanding sought. For many cryptocurrency users, recognizing that staking represents a method to earn rewards while hodling specific cryptocurrencies is the fundamental takeaway. However, even for those simply interested in gaining staking rewards, having a basic understanding of the underlying mechanics and rationale can prove beneficial.
If a cryptocurrency you own supports staking, which is the case for options like Ethereum, Near, Mina, Solana, ATN, and others, you have the opportunity to "stake" a portion of your hodlings and gradually earn rewards over time.
The reason your cryptocurrency earns rewards while staked is because it actively contributes to the operation of the blockchain. Cryptocurrencies that permit staking typically utilize a "consensus mechanism" called Proof of Stake. This mechanism ensures the verification and security of all transactions without the need for an intermediary such as a bank or payment processor. By choosing to stake your crypto, you essentially make it an integral part of this transaction verification process.
At this point, the discussion becomes more technical. Bitcoin, for instance, doesn't facilitate staking. To comprehend why, a bit of background information is necessary.
Cryptocurrencies are typically decentralized, implying the absence of a central authority overseeing the operations. In a decentralized network, how do all the computers collectively arrive at the correct answer without relying on a central authority, such as a bank or a credit-card company? The solution lies in the utilization of a "consensus mechanism."
Numerous cryptocurrencies, including Bitcoin and Ethereum 1.0, employ a consensus mechanism known as Proof of Work. In this system, the network dedicates substantial processing power to solving complex problems, such as validating transactions between individuals located on opposite sides of the planet, and ensuring the prevention of double-spending. The process involves global "miners" competing to be the first to solve a cryptographic puzzle. The victorious miner earns the privilege to add the most recent "block" of verified transactions to the blockchain and is rewarded with a portion of cryptocurrency in return.
For a relatively straightforward blockchain such as Bitcoin's, which operates akin to a bank's ledger by tracking incoming and outgoing transactions, Proof of Work proves to be a scalable solution. However, for a more intricate system like Ethereum, which supports a wide range of applications, including the extensive realm of decentralized finance (DeFi) running atop the blockchain, Proof of Work can lead to bottlenecks during periods of heightened activity. Consequently, transaction times may be prolonged, and fees can rise as a result.
A more recent consensus mechanism known as Proof of Stake has emerged with the aim of enhancing speed and efficiency while concurrently reducing fees. One significant way Proof of Stake achieves cost reduction is by eliminating the need for numerous miners to engage in computationally intensive problem-solving, which is an energy-consuming process. Instead, transactions are validated by individuals who stake their tokens in the network.
Staking serves a parallel function to mining, as it involves the process through which a participant in the network is chosen to append the most recent set of transactions to the blockchain, earning cryptocurrency in return. Stakers not only contribute to this validation process but also play a role in determining the validity of individual blocks.
The specific implementations can differ across projects, but fundamentally, users vote their tokens to safeguard the security of the blockchain. By staking their tokens, users provide assurance of their good faith actions and create a disincentive against violating the protocol rules.
Numerous cryptocurrency investors with a long-term perspective view staking as a means of actively leveraging their assets to generate rewards, rather than allowing them to remain dormant in their cryptocurrency wallets.
Engaging in staking serves as a means to actively contribute to the security and effectiveness of the blockchain projects you endorse. When you stake a portion of your funds, you enhance the blockchain's resilience against potential attacks and reinforce its capacity to efficiently process transactions.
Participating in staking typically involves a lockup or "vesting" period, during which your cryptocurrency becomes non-transferable for a specified duration. This limitation can be a drawback, as it restricts the ability to trade staked tokens even in the face of price fluctuations. Prior to engaging in staking, it is crucial to thoroughly research the unique staking requirements and regulations associated with each project you intend to participate in.
Staking is generally accessible to anyone interested in participating. However, achieving the status of a full validator may necessitate meeting certain criteria, including holding a minimum number of tokens, possessing technical expertise, and maintaining a dedicated computer capable of continuous validations without downtime, day or night. Involvement at this level entails security considerations and carries a significant responsibility, as any downtime can result in the slashing of a validator's stake.
However, for the majority of participants, there is a more straightforward method of involvement. Utilizing an exchange such as Coinbase, you can contribute any desired amount without the requirement to buy or manage costly validator hardware. Staking is accessible to a large number of Coinbase customers in the U.S. and numerous other countries.