Staking cryptocurrencies is a term that has gained momentum over the last several years and become a common practice in the DeFi space. Staking also ties into the Proof-of-Stake consensus which we’ll get to below. As we explore what is staking crypto, you’ll learn what it is, what it entails, and why staking has become so popular.
Let’s Cover The Basics: What Is Staking Crypto?
Staking is the act of holding cryptocurrency in your wallet for a period of time. Sometimes staking can be to support the security and operations of a blockchain network, while other times it may be done as means to earn rewards. Which cryptocurrency you are staking and where the staking is taking place will determine which side of this equation you’re on.
To better understand what staking is you’ll need to understand how Proof-of-Stake (PoS) works.
What Is Proof-of-Stake?
There are two main types of consensus mechanisms used to manage cryptocurrency networks.
One is Proof-of-Work, used by Bitcoin which involves miners racing to solve a complex cryptographic puzzle in order to verify transactions and add them to a block. All miners on the network use electricity when attempting to solve this puzzle, resulting in a large amount of wasted power. Additionally, many have questioned the relevance of the complex cryptographic puzzle and its “arbitrary computation”.
The other consensus mechanism is Proof-of-Stake, and instead of miners racing to solve a puzzle in order to get chosen to mine the next block, participants are chosen based on the amount of that cryptocurrency they have staked. Staking involves “locking” coins in your wallet. The PoS consensus will randomly assign mining rights to various participants typically based on the proportion of staked coins, i.e. the more coins a participant has staked, the higher the chances are of being chosen to validate the next block.
PoS is often considered to be the better of the two options when it comes to a platform’s scalability. Through using the staking mechanism, the platform has the ability to grow its capacity in order to handle more transactions. A prime example of this is illustrated with Ethereum’s move from a PoW to a PoS consensus, commonly known as ETH 2.0.
How Does Staking Work?
As we’ve mentioned above, through the process of staking, PoS blockchains create and validate new blocks. This process involves the validators locking up their coins in various wallets or protocols and waiting to be randomly chosen by the network to create a block. This is done at random intervals determined by the particular network. Typically, the more you stake the higher your chances are of being chosen.
This process also eradicates the need for energy-intensive mining hardware like ASICs, popular for Bitcoin mining. Staking allows miners to invest directly in the cryptocurrency they are participating in as opposed to investing the money in hardware. By holding a stake in the cryptocurrency, the participants are also incentivised through their own capital to maintain the network’s security and ensure that the network runs smoothly.
Usually, there is a minimum amount necessary to stake in order to engage in the mining activity on the network. This will also typically come with a timeframe attached, i.e. you need to stake a certain amount of the cryptocurrency for a certain amount of time before being acknowledged as a miner.
When it comes to staking for rewards, users will need to hold their chosen cryptocurrency in a wallet or send it to a protocol wallet, from where the rewards will be distributed based on factors like how long it is staked for and how much has been staked.
What Are Staking Pools?
Similar to mining pools, staking pools are groups of miners that merge together their resources in order to increase their chances of being selected to produce and validate blocks. The rewards from validating the block are then shared equally (or proportionally) between the pool.
Where Can I Stake Crypto To Earn Rewards?
As we mentioned in the beginning, staking can also be done as a means to earn rewards. This concept is the idea behind many DeFi (decentralized finance) projects where users can stake their crypto to earn a fixed interest or yield farming rewards. There are also a number of cryptocurrencies that allow users to stake and earn interest, without having to engage in the process of validating blocks. See the top staking cryptocurrencies for 2021 below:
- Ethereum 2.0 (ETH)
Users will need to own a minimum of 32 ETH to stake on ETH 2.0 and become a validator. Alternatively, there are several third party staking pools where users can stake smaller amounts, minimum amounts depending on the platform.
- Tezos (XTZ)
Staking XTZ is known as baking, and users will need a minimum of 8,000 XTZ coins and to run a full node.
- Algorand (ALGO)
Users will need a minimum of 1 ALGO to begin the staking process and are required to run a full node in order to qualify for the rewards.
That concludes our explanation of what staking crypto is, for more insightful content be sure to check out our Oobit blog.