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What is Staking

Nov 12, 2021 | DeFi

What is Staking?

Staking is a phrase you will hear frequently in the Crypto industry and it can be a complex idea or simple one depending on how deep you want to dig. Crypto Staking is similar to depositing money in a bank and in return you earn a percentage-rate reward over time for locking up your assets. Before delving into the practicalities of staking, we first need to understand the mechanism that underpins the staking process; Proof of Stake.

What is Proof of Stake?

Proof of stake is new consensus mechanism that emerged with the idea of increasing blockchain speed and efficiency and allowing for blocks to be mined without relying on specialised mining hardware, such as ASIC computers but instead network participants. Participants can pledge their coins to the cryptocurrency protocol for a chance to add the new block onto the blockchain in exchange for staking rewards.

Participants that stake larger amounts have a higher chance of being chosen as the next block validator. This model is far more energy efficient than proof of work, as it doesn’t have to rely on miners to validate the blocks.

The Practicalities of Staking

On a very practical level, Staking involves transferring funds from a cryptocurrency wallet to a blockchain validator node in order to support the security and operations of a blockchain network. The reason your assets receive rewards whilst being staked is that the blockchain validator puts your assets to work using a proof of stake (PoS) model.

This process is used to ensure that all transactions are verified and added to the blockchain. It is important to note that staking is only available with those cryptocurrencies that use the PoS model.