Staking is one of the most commonly used terms in the crypto space. It is a process through which individuals lock their crypto assets known as “stakes”, to support the security and operations of a blockchain network.
Staking is done on proof-of-stake networks such as Ethereum, Cardano and the others, but not on proof-of-work networks like Bitcoin. By staking their assets, stakers help to secure the network and also serve as transaction validators on the blockchain.
Once staked, funds are locked up and cannot be accessed for an agreed period of time, after which they will be unlocked for the stakers to access, as well as their staking rewards, which come from transaction fees paid by users of the network.
In a proof-of-stake blockchain like Ethereum, a staker must own at least 32 ETH to qualify. Once they stake their ETH, they become validators, helping the network reach consensus on transaction finality on the network.
How Does Staking Work?
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Staking is usually done using the native currency of the blockchain network. For Ethereum, it is ETH while for Cardano, it is ADA etc. To participate in staking on any network therefore, you must acquire some of the native currency of that network.
There are different ways you can participate in staking, depending on how much of the native currency you have, your technical expertise and and how much control you wish to have on the process. If you are the tech savvy type, you can choose to set up and operate a validator node on the blockchain.
This gives you full control of the staking process, but also comes with more responsibility and risks. Not a tech person but you have enough to stake? You can use a staking-as-a-service platforms that allows users to delegate their stake to a third-party service provider who runs a validator node.
This gives you control over your funds, but delegates the responsibility of running the validator node to a trusted service provider. Another method is pool staking, which combines your stake with those of others in one pool. This method allows those with insufficient resources and no technical expertise to delegate their resources to a staking pool and then earn rewards from the pool.
Lastly and probably the easiest, you can stake using a centralized crypto exchange. Most crypto exchanges offer staking services to their users, allowing them to stake crypto assets without running a validator node, using a third party, or a pool. This is by far the most convenient, but you should be careful which exchange you stake your assets with.
Why is Staking Important?
There are many benefits to staking. First and the most obvious benefit is the reward it provides to stakers. This creates an easy passive income stream for anyone willing to participate, and it is one of the easiest things to do in the crypto space.
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Secondly, it helps with decentralization. By allowing anyone with a reasonable amount of the native currency to stake, PoS blockchains encourage decentralization of the network, so that it will have as many network validators as possible.
Thirdly, it is a more efficient method of validating transactions than the proof-of-work consensus. It does not require as much energy to maintain as PoW networks do.
Risks of Staking
While crypto staking has many advantages, both to the staker and to the network, it also comes with significant risks the staker should know about. First, cryptocurrencies have high volatility, that is their prices can change abruptly. This means the value of your staked crypto assets can drop rapidly, resulting in losses.
There’s also the risk of a validator penalty. This is a situation in which a validator’s stake may be slashed as a penalty for either double-signing a transaction or going offline for an extended period of time. This can result in losses as well.
Technical faults such as bugs affecting the smart contract operating the network may also lead to loss of the staked assets.
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