What is Staking Crypto? What Does Proof-of-Stake (PoS) Mean in Crypto?

Crypto Staking Explained

1. How does staking work?

Staking is the process of actively participating in the operation of a proof-of-stake blockchain network by holding and "staking" a certain amount of cryptocurrency to support network functions, such as transaction validation or block creation.

Staking involves locking up a specific amount of cryptocurrency in a designated wallet or platform. This locked cryptocurrency is then used as collateral to support network operations and earn rewards in the form of additional cryptocurrency tokens.

2. What is the purpose of staking on a cryptocurrency network?

Staking serves several purposes, including enhancing network security, achieving consensus, and providing incentives for participants. It helps maintain the integrity and functionality of the blockchain.

3. Is staking the same as mining?

No, staking and mining are different methods of validating transactions and securing blockchain networks. Staking relies on the ownership and collateralization of cryptocurrency, while mining involves solving complex mathematical puzzles using computational power.

4. What types of cryptocurrencies can be staked?

Many blockchain networks support staking, but the specific cryptocurrencies that can be staked depend on the network's design. Common cryptos that can be staked include Ether (ETH), Solana (SOL), and Polygon (MATIC).

What is Proof-of-Stake?

A core element of any blockchain network is its consensus algorithm, the mechanism by which all network stakeholders agree on the validity of the network’s shared data and then secure that data on the blockchain. A blockchain network must achieve consensus before it can move on to a new block of data. As an update to the energy-intensive and limited Proof-of-Work (PoW) consensus mechanism, that has been a standard in the blockchain industry since the launch of Bitcoin, Proof of Stake (PoS) represents an evolution in consensus algorithms and is gaining traction across many blockchain networks — including Tezos, Cosmos, and Ethereum 2.0.

When compared to PoW networks that require energy-intensive data mining via costly hardware used to confirm blocks, PoS offers major advantages in speed and efficiency. In PoS blockchains, an individual or group is randomly chosen to verify transactions by an algorithm that takes into consideration the number of tokens they have staked, or locked up, on the network as a form of collateral. Those who are chosen to confirm a block historically receive the transaction fees associated with that block as a reward. The stake acts as a deterrent against malicious activity, since those responsible for the block lose their tokens should fraudulent activity be detected.

PoS was first employed by Peercoin in 2013. The concept has since taken off with multiple high profile blockchain projects utilizing PoS and Delegated Proof of Stake (DPoS), an iteration of the PoS model in which you pool tokens toward staking delegates. In DPoS blockchains, users stake tokens on a network and assign them to their preferred delegates. On some blockchains, delegates can influence the governance of a blockchain based on the amount of support they receive in the form of staked tokens. Some notable blockchains that utilize PoS or DPoS include Tezos, Cosmos, Cardano, EOSIO, Algorand, and Synthetix Network. The most eagerly anticipated implementation to PoS was Ethereum’s transition from PoW to PoS — referred to as Ethereum 2.0 — which was released in September 2022.

How To Stake Tokens in a PoS Network

The first step toward staking in a PoS network is holding the blockchain’s native cryptocurrency. For instance, to participate in Tezos staking, you would need XTZ; to participate in Cardano staking, you need ADA, etc.

While there are differences between how you participate in the varying PoS blockchain networks, the general order of operations is as follows:

• Download a wallet that enables staking for the coin you hold. 

• Some protocols require a minimum number of tokens to be staked. For example, to stake on Tezos, you need at least 8,000 XTZ. Ethereum 2.0’s iteration of PoS  requires 32 ether (ETH).

• Validators must stay online 24/7, so hardware with uninterrupted internet access is necessary. Basic setups with Raspberry Pi or desktop computers are options, but you can also run staking on the cloud using virtual private servers. 

• Your wallet acts as a node that stakes your cryptocurrency in an attempt to validate and create a new block. With DPoS, your staked tokens support a delegate to validate and create a new block.

In PoS protocols, the larger the stake, the larger your chance of being chosen to create the next block and earn staking rewards. In DPoS protocols, a certain number of delegates are chosen based on staked tokens supporting them. If the delegate you put your stake behind creates the block, the delegate distributes the block rewards proportionally to the individuals that made up their stake.

Staking Rewards

PoS blockchains may provide an opportunity to earn income on crypto holdings through staking.

When choosing a staking blockchain to participate in, it’s important to consider token dilution, or the inflation of the token. Dilution refers to the reduction in value of a single cryptocurrency or the market capitalization of a cryptocurrency protocol due to the minting of new tokens. The more tokens are minted, the less existing tokens are worth, barring all other external factors.

Staking on PoS networks presents a relatively stable opportunity to earn passive income on your digital assets while providing a faster, more scalable, and less energy intensive blockchain infrastructure. Many Proof-of-Stake blockchains also allow you to participate in the governance of the protocol by staking tokens as a vote for certain protocol upgrades or adjustments to the roadmap, enabling decentralized governance in the future of the protocol.

Experimentation and iteration continues to develop PoS algorithms that better balance speed, efficiency, and security, while also aligning incentives and decentralizing governance. Many consider PoS to be crucial as blockchain technology increases its scale and complexity, and sets its sights on application in sophisticated markets and industries. Despite its status as an experimental and iterative technology, PoS algorithms are fast becoming an integral aspect of the blockchain ecosystem.