Staking (Blockchain Staking)

What is Staking?

A simple staking definition is a passive way for crypto holders to earn a yield on their crypto without selling it. An easy way to think about it would be to compare it to a high-interest savings account with your bank.

However, unlike a savings account with your bank, when a user stakes their crypto, they are also participating in running a blockchain consensus mechanism and contributing to its overall security.

How Staking Works

Staking is done through blockchains that utilize the proof of stake (PoS) consensus mechanism. Proof of stake was developed as an alternative method to validate blocks in a blockchain sequence.

Instead of a competition between validators that expends immense energy, like in proof of work (PoW), proof of stake operates on a nomination system, where the next validator is randomly assigned. That is the problem it solves, but what is staking crypto, and how does it work?

Validators can increase their chance of becoming the next successful validator by “staking” more crypto. One method validators may use to increase their collateral is by creating a staking pool to which anyone can contribute. This allows anyone holding that specific crypto to participate in the process and share in the block rewards.

To become a validator, a user must lock up a large amount of crypto as collateral (their “Stake”). This stake incentivizes the validators to act honestly. If they engage in malicious activity by validating incorrect or fraudulent transactions, they can be issued a slashing penalty from their stake or become temporarily prevented from validating blocks. By having a large stake in the success of the blockchain, validators are further encouraged to act honestly, as any fraudulent activity would ultimately undermine the blockchain and be reflected in the corresponding crypto valuation.

Types of Staking

Despite the end result being the same for anyone who stakes, there are a number of different methods users can take to stake their crypto, including:

The Role of Validators and Delegators in Staking

Validators: Full nodes that validate the transactions of a blockchain. Becoming one often requires locking up significant capital as collateral.

Delegators: Participants who contribute crypto to a validator. Delegators receive part of the validator’s reward for successfully validating the transactions in a block.

What Cryptos Can You Stake?

You can stake on any proof of stake blockchain.

Some notable examples would be Ethereum (ETH), Solana (SOL), Cardano (ADA), Binance (BNB), Polygon (MATIC), and Polkadot (DOT).

Some centralized exchanges may list some non-PoS cryptos, like Bitcoin (BTC), as being able to be staked. However, these are not true staking options and instead reflect an internal CEX lending policy.

How Profitable is Staking?

The profitability of staking can be attributed to several factors. Most staking third-party providers provide a specific return percentage that increases the longer the participants lock their stake in, while others give a floating range.

When staking through a pool, your contribution to the pool will be the determining factor for profitability. The more crypto you contribute through staking in a pool, the larger your share can be. Keep in mind that the largest pools have the highest chance of becoming the next validator chosen but are also the most popular among delegators, so rewards will be split among more participants.

It is also important to note that staking often has lock-up periods, and if the value of your crypto falls while it is being staked, you could end up with a total amount of crypto worth less than when you started.

What is Staking Ethereum?

Staking Ethereum is simply the process of staking ETH. It is the largest PoS blockchain by volume and market cap.

In the lead-up to The Merge in September 2022, when Ethereum moved from a PoW to PoS consensus mechanism, users could stake their ETH1 from the old Mainnet Chain to earn ETH2 tokens on the new PoS Beacon Chain.

Staking Pros and Cons

Future of Staking

The first iteration of staking from proof of stake blockchain emerged in 2013 with Peercoin. Since then, PoS and staking have become the consensus mechanism of choice for many blockchains, including Ethereum, after notably switching from PoW to PoS in September 2022.

Most of the early staking efforts were experimental, trying to find an alternative to the massive energy-consuming PoW blockchain. Developers continue to look for ways to iterate and offer users new and innovative staking options. Liquid staking is one example where users still have access to the liquidity of their staked assets through synthetic LSTs. This seems to becoming more common, and with the interoperable ability of many blockchains, this trend is likely to continue.

The Bottom Line

Staking has advanced significantly over the years, offering participants the opportunity to earn passive income on their crypto while also contributing to network security. While many users prefer staking and PoS blockchains because of their ability to earn passive income, the real meaning of staking is that it helps solve the scalability issue that all blockchains face in a novel way without fully centralizing the process.

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