How Does Staking Work?

Perhaps you’ve heard about it several times, but haven’t taken the time to understand what it is. Or maybe you want to give staking a try but unsure how to do it.

In this post, we’ll tackle the basic concepts behind cryptocurrency staking. We’ll define what staking is, how does staking work, the main purpose behind staking, and the coins and exchanges you can use to start staking activities.

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In order to start staking, you’ll need to put a number of coins into a “safe”

Cryptocurrency Staking Defined

Staking, in simple terms, involves locking cryptocurrencies to your wallet to receive rewards.

Specifically, staking is the process of participating in blockchain operations to gain rewards. The crypto assets you lock-in are used to validate transactions in the blockchain. Staking activity almost resembles mining, however, a Proof of Stake (PoS) algorithm is used instead of the typical Proof of Work used in mining blockchains.

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By putting crypto assets in a staking pool, you’ll receive reward fees once your block is chosen

Reward fees are earned as a result of staking your cryptos. You need to stake and maintain a minimum balance of a particular cryptocurrency to reap these rewards.

How Does Staking Work?

The heart of staking lies in the Proof of Stake (PoS) consensus algorithm. You lock in a particular amount of cryptocurrency coins – the coins become your “stake”. Then, the PoS protocol randomly assigns the task of validating the next block to any of these coins. The more coins you stake, the higher chances they’ll be chosen by the protocol to validate block transactions. However, in order to generate a more democratic approach, 2 other variants come into effect: randomization and staking age.

Imagine your block is a piece of pizza where the toppings are randomization, staking age and node’s wealth. Depending on the consensus algorithm, you’ll be able to take a bite out of your slice of your pizza. So doesn’t matter how much pepperoni (node’s wealth) is there in your slice, you were randomly selected to actually be able to take a bite out of it.

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You put all the ingredients to build this pizza and each slice will be a block

Platforms then incentivize you by creating and giving you stake rewards. They come in the form of transaction fees or newly-minted tokens and/or crypto assets. Staking rewards are often comparable to earning interest from money parked in a bank.

Staking Purposes

What is the main purpose of staking? This activity is done to secure the blockchain and the transactions happening inside it. Staking allows recurring transaction validations to take place, which in turn keeps the blockchain secure.

Other purposes of staking include providing crypto-asset holders a way to earn passive income and serving as a less energy-consuming alternative to mining.

Pros and Cons of Staking Cryptos

What are the advantages of staking? We list them down here:

  • A more predictable passive income source than mining
  • Provides blockchains with a higher scalability degree
  • Staked coins’ value doesn’t depreciate easily
  • Eco-friendly; eliminates the need for high computing power and expensive hardware used in mining
  • Some platforms allow you to stake multiple kinds of crypto assets, providing more income in the long run

Meanwhile, a few downsides of staking crypto assets include:

  • The need to lock-up more coins to increase the chances of being selected for blockchain validation
  • Crypto price volatility may affect your generated income from staking
  • Division of earnings from joining crypto staking pools
  • High risk of cryptocurrency turnover decrease

When to Stake Coins and Which Coins to Use

So, the next question comes in: When can I stake my coins? You can stake coins as long as it reaches a minimum amount set by the crypto wallet, staking platform, or staking pool. It’s typically easy – simply hold your coins on the wallet and enable staking once it reaches the recommended coins amount for staking.

Now, another frequent question from staking beginners is “Which coins can I stake?”. This may differ depending on the wallet/platform/decentralized finance app (dapp) you use. However, the most common coins include:

Staking platforms are continuously enabling more coins for staking. For instance, Ethereum (ETH) is gradually migrating from mining (Proof of Work) to staking (Proof of Stake) – so you can stake your ETH coins soon.

Staking Wallets and Exchanges

Finally, the last question that may be hovering on your mind is “Which wallets/exchanges allow me to stake?” Turns out there’s a lot, such as the following:

Conclusion

Staking coins allow you to participate in blockchain validation while earning passive income from it. This is among the simplest forms of profiting from your crypto assets – you simply lock them in and it gains profits from staking rewards over time. Plenty of wallets and coins can be staked, and more are added to them as some crypto blockchains migrate from mining PoW to staking PoS.