Staking (Blockchain Staking)

What is Staking?

Staking is a way for cryptocurrency holders on a proof-of-stake (PoS) blockchain to earn passive income by validating transactions and adding new blocks to the blockchain.

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In exchange for their work, validators are given rewards in accordance with the PoS blockchain that’s being used. Ethereum, for example, rewards validators with newly minted cryptocurrency. Cardano, on the other hand, rewards validators with transaction fees.

Staking helps ensure that only legitimate data and transactions are added to a blockchain. To participate, the user needs to set up a staking node.

This involves running a software client on a computer or server that meets the blockchain’s requirements for becoming a validator. Once the node is set up, the user can initiate staking by locking up a specified amount of the blockchain’s cryptocurrency in a wallet or a smart contract. The locked crypto acts as collateral in case the validator acts maliciously or fails to meet the blockchain’s performance standards.

Once the cryptocurrency is locked up, the staking node becomes eligible to participate in the network as a validator. Some PoS blockchains use a random selection process to ensure that all nodes have an equal chance of becoming a validator.

Most blockchains that use PoS, however, select validators based on how much crypto the user has locked up. The rationale is that if someone has a large stake in the network’s success, they will act in network’s best interest.

Techopedia Explains

Staking is generally considered to be a low-risk, long-term investment strategy that can provide investors with a steady stream of income from cryptocurrency the investor intends to hold on to. Investors can get into staking on a PoS blockchain by staking their cryptocurrency individually, joining a staking pool or using a third-party staking-as-a-service provider.

Staking Pools

A staking pool is a group of cryptocurrency holders who combine their funds to increase their chances of being selected as a validator. This type of pool is typically run by a single entity and charges users a fee for joining. Rewards are distributed in proportion to each pool member’s contribution.

Staking-as-a-Service

Staking-as-a-service is a cloud computing service that allows cryptocurrency holders to become validators without having to set up and maintain their own staking nodes.

Staking-as-a-service providers typically offer services for multiple PoS blockchains and charge users a fee for using the service. Services can be custodial or non-custodial.

Custodial: The user transfers cryptocurrency to the service provider, who then stakes it on the user’s behalf. Because the service provider holds the user’s cryptocurrency, the user needs to trust the service provider to act in their best interest.

Non-custodial: The service provider offers a platform or software client that enables the user to stake their cryptocurrency themselves without having to transfer it to the service provider. Although this approach gives the user greater control over their investment, it requires the user to have more technical expertise.

Risks of Staking Crypto

Staking is generally considered to be safe, but like any investment or financial activity, it does carry risks. Here are some of the risks:

  • Validators who fail to meet a blockchain’s performance standards for uptime can lose the cryptocurrency they’ve staked.
  • The rewards someone earns may not be enough to offset losses if the cryptocurrency experiences volatile price fluctuations.
  • The process limits the user’s liquidity because it requires cryptocurrency to be locked up for a specific period of time.
  • Compliance regulations for staking are still developing. Changes in tax laws could significantly impact the risks and rewards of this type of investment.

To take advantage of the benefits that staking provides, users should not stake more cryptocurrency than they can afford to lose.

Popular Cryptocurrencies That Allow Staking

Popular cryptocurrencies that allow staking include:

Ethereum: Allows users to deposit 32 ETH to activate validator software.

Solana: Allows validators to earn rewards and help secure the network by staking tokens to one or more validators on Solana’s Mainnet Beta.

Cardano: Known for rewarding validators who perform well and act honestly.

Polkadot: Known for requiring user who want to participate in the network as a validator to be nominated by other DOT holders.

Tezos: Known for allowing holders to delegate their XTZ to other validators.

Popular DEXs That Allow Staking

Popular crypto exchanges that offer staking rewards include:

OKX: Allows users to earn interest by staking popular stablecoins such as Tether and USD Coin, as well as a large selection of other popular cryptocurrencies such as Bitcoin, Ethereum, BNB, Dogecoin, Ripple. Cardano, Litecoin, Solana, Tron, Near Protocol, Shiba, and many more.

Binance: Allows staking for Algorand, Audius, Avalanche, Band Protocol, BNB, Cardano, Celer Network, Cosmos, Flow, Ethereum , Fantom, Fetch.ai, Harmony, Kava, Kusama, Livepeer, Near Protocol, Oasis Network, Polkadot, Polygon, SKALE Network, Solana, Tezos , The Graph, Threshold Network Token, Tron and VeChain.

Coinbase: Allows users to stake Algorand, Aptos, Avalanche, Axelar, Cardano, Celo, Cosmos, Ethereum, Evmos, Flow, Livepeer, NEAR, Osmosis, Polygon, Polkadot, Provenance and Solana.

 

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Margaret Rouse
Technology Expert

Margaret is an award-winning technical writer and teacher known for her ability to explain complex technical subjects to a non-technical business audience. Over the past twenty years, her IT definitions have been published by Que in an encyclopedia of technology terms and cited in articles by the New York Times, Time Magazine, USA Today, ZDNet, PC Magazine, and Discovery Magazine. She joined Techopedia in 2011. Margaret's idea of a fun day is helping IT and business professionals learn to speak each other’s highly specialized languages.