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Staking is the process of temporarily locking up cryptocurrency in order to help secure a blockchain network in return for financial reward – in the form of more cryptocurrency.
Similar to mining, staking is a way to earn revenue by participating in the operation of a blockchain, but it only requires capital in the form of coins or tokens rather than investing in mining hardware. As a result, staking has become one of the most prominent ways to earn an income from cryptocurrency.
Staking is the process of depositing cryptocurrency into a smart contract on a network to receive tokens as a reward. These staked coins act as a form of collateral to enable various functions, which range from validating transactions on the network to providing financial collateral in order to mint new tokens. Exactly how staking works, and the rewards paid for doing so, varies between each blockchain and dapp.
Staking originated as part of a consensus mechanism known as proof of stake (PoS). Proof of stake enables stakers to validate blocks by depositing their tokens as collateral as a means of ensuring honesty when validating transactions. If the validator were to submit false transactions to the network, they would be punished by missing out on block rewards or even losing a portion of their staked tokens. Inversely, validators are rewarded with newly minted tokens for doing the right thing.
Typically, a validator’s chance of validating a block (and earning rewards) is proportional to the number of tokens the holder has compared to the total amount staked across the network.
This is compared to proof-of-work (PoW) blockchains like Bitcoin and Ethereum, where miners add new blocks to the blockchain using advanced computational algorithms and high processing power using mining hardware like application-specific integrated circuits (ASICs) and graphics processing units (GPUs).
Staking has played an essential role in the success of decentralised finance (DeFi), with many decentralised apps (dapps) requiring tokens to be staked in order for the service to work. Because staking occurs at the dapp level, there is more flexibility in how tokens are staked and how rewards may be earned as opposed to the more rigid process of PoS to secure the underlying blockchain.
For example, Uniswap users provide liquidity to the market by staking coins in return for liquidity provider tokens (LPT). The staked coins then create a pool of collateral for users to trade in and out of, which eliminates the need for a counterparty on each trade. In return for staking tokens, depositors receive a cut of the trading fees for the pool, and their LPT essentially works as an IOU coupon enabling the holder to redeem their deposit later on.
Staking can be achieved in a number of ways, but typically it involves four key aspects:
Staking can be done directly from compatible cryptocurrency wallets. Some cryptocurrency exchanges such as Binance and KuCoin even offer staking services to the users of their platform, which provides a convenient way to earn money while keeping coins ready to trade. Some blockchains also entitle stakers to voting rights on protocol changes to the blockchain, which means that these rights are instead awarded to the exchange if that’s where you’re storing your coins – something to think about.
To overcome the minimum threshold of tokens that participants need to own to become a part of the staking process, there is an innovation known as staking pools, which allow multiple holders to combine their computational resources in the blockchain to increase the chances of earning block rewards.
The funds of all the stakeholders in the staking pool are collected and locked in one blockchain or wallet address. The pool is managed by a pool operator and the stakeholders. Any voting powers are directly proportional to the number of tokens a stakeholder has locked within that particular pool.
When compared to individual staking, staking pools generally offer smaller rewards as the reward is split between all the stakeholders in the pool, and there are often staking pool fees involved as well. On the flipside, staking pools are a good option for consistent passive income for stakers who aren’t willing to get technically involved in maintaining and running a node for validation.
The token holder can stake their coins either through their own cryptocurrency wallet or through cryptocurrency exchanges, such as Binance or Coinbase, that offer staking services to users that register on their platform. There are several cryptocurrency wallets through which users can stake their cryptocurrency funds. You can find a list of these wallets below.
There are several centralised and decentralised exchanges that offer staking services on various tokens. Here is a list of a few of the major exchanges that offer these services:
Most of the native tokens of PoS blockchains can be used as a tool for staking. Here is a non-exhaustive list of cryptocurrency tokens that can be staked on their blockchain either through wallets or cryptocurrency exchanges:
Each blockchain or smart contract may use a different method of assigning and calculating staking rewards. The profitability of the rewards is highly dependent on the structure and conditions of the staking rewards of that particular network. A few blockchains offer a fixed percentage of the funds as a staking reward, while many others base the rewards on various factors. Some of these factors are listed below:
Here is a non-exhaustive list of cryptocurrency wallets that allow users to stake digital tokens directly from their own wallets where they hold their cryptocurrencies:
Even though staking is mostly safe, there are some risks attached to staking funds in a blockchain network or dapp:
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