What is Crypto Staking?

Home Blog Post

Technology and the development of economic ecosystems around cryptocurrencies have led to the development of staking, a process that allows us to obtain profits and the right to vote on a cryptocurrency project by doing something very simple, saving.

The staking process consists of acquiring cryptocurrencies and keeping them locked in a wallet in order to receive profits or rewards. It is a process very similar to the HODL, only that at stake the balances are blocked and you cannot use them freely. At the same time, it contributes to the operation and functioning of the blockchain of that same cryptocurrency.

As we well know, the blockchain is the technology that allowed cryptocurrencies to come to life. And each cryptocurrency has its own blockchain to keep its records of the transactions carried out. But although they are different blockchains, they all have a common relationship: transactions must be validated in consensus.

For this, each blockchain adopts a consensus protocol, such as Bitcoin, which employs Proof of Work (PoW) for block mining. A process that demands great computing power and therefore consumes a lot of electricity. But other cryptocurrencies, such as NEO, Stellar, Algorand and Ethereum use another mechanism, known as Proof of Stake or Proof of Stake (PoS).

In this protocol, stored cryptocurrencies are used as a way to verify transactions within blockchains. So staking is a process particularly adopted in blockchains that operate with Proof of Stake (PoS), or one of its variations.

How does Staking work?

In the PoS consensus protocol the nodes are known as validators. And they are the ones in charge, as the name implies, of validating the generated blocks.

The choice of these validator nodes is a process that occurs randomly, very similar to that of a lottery. Although they are more likely to be chosen, those nodes that have the greatest amount of cryptocurrencies. As we already mentioned, in the PoS the validation of blocks does not occur through mining, but is carried out by those nodes that have cryptocurrencies in their possession. So the PoS is based on staking. Encouraging users to keep their funds in a wallet to contribute to the support of the network and obtain profits from it.

So, to perform staking, it is enough to acquire a cryptocurrency that allows this process, and use the official wallet to stake. Thus, just by keeping those cryptocurrencies stored, rewards can be obtained from the network. Very similar to having a savings account and receiving interest on your funds.

Staking Types
Staking Groups

They are groups of users that come together to increase their possibilities as block validators. So they unify all their funds to have greater staking power. Then, when they receive the rewards, they divide them among all the participants in a way equivalent to the individual contribution that each one made.

Cold Staking

It is about staking from a cold wallet. Like a hardware wallet that does not have a permanent connection to the Internet. Some blockchains allow this type of staking, helping their users to keep their funds offline, and therefore much more secure.

Staking Providers

This modality allows many to offer a service dedicated to coin users to stake. However, the profitability with this type of staking depends a lot on the commissions that they charge. That can range between 2% and up to 50% of the rewards. Therefore, they would contribute a lower percentage of profits than if staking was carried out only from a platform.

Posted by