Staking is a procedure whereby individuals lock their cryptocurrency holdings (referred to as their "stake") to actively support the security and operational aspects of a blockchain network. When someone stakes their coins, they essentially contribute to safeguarding the blockchain and validating its transactions.
Staking is exclusively viable on blockchains that employ a proof-of-stake (PoS) consensus mechanism, such as Ethereum and Cardano. This differs from the proof-of-work (PoW) system used by cryptocurrencies like Bitcoin, where miners employ computational power to validate transactions.
Staking coins can reduce the liquidity of a user's holdings since the coins are tied up in the staking process. Individuals can typically access their staked coins but may only be able to utilize them for other purposes once they are no longer staked.
The PoS algorithm utilizes a pseudo-random selection process to designate validators from a pool of nodes. This selection method takes into account various factors, such as the age of the stake, randomness, and the node's wealth. Nevertheless, each PoS cryptocurrency has its own distinct set of rules and methods tailored to create what it deems the most effective combination for the network and its participants.
PoS facilitates block production without relying on specialized mining hardware like ASICs. While ASIC mining necessitates significant investments in hardware and energy for mining operations, staking demands an investment in the cryptocurrency itself.
In PoS, blocks are generated rather than mined. When a node is chosen to create the next block, it verifies the transactions within the block for validity, signs the block, and adds it to the blockchain. As a reward, the node receives transaction fees from the block and, on certain blockchains, a coin reward.
Should a node choose to cease its role as a block forger, its stake and earned rewards are released after a designated period, allowing the network to confirm that no fraudulent blocks were added to the blockchain by the node.
Some argue that block production through staking enhances the scalability of blockchains. This is a significant factor behind Ethereum's transition from PoW to PoS through a series of technical upgrades collectively known as ETH 2.0.
Each PoS blockchain network features a specific staking currency used in the staking process. Typically, this staking currency is the native cryptocurrency of the blockchain network.
For instance, if a PoS blockchain is built on Ethereum, the staking currency would be ether. Similarly, when a new PoS blockchain network is launched, it often introduces a new cryptocurrency as the staking currency for that network. Users who wish to participate in that network need to acquire the specific staking currency to participate.
There are various methods to stake cryptocurrencies, and the choice depends on an investor's technical expertise, the amount of cryptocurrency they want to stake, and their preferred level of control.
One option is to set up and maintain a validator node on the blockchain, a method that requires technical proficiency and offers the most control over the staking process but also entails more responsibility and potential risks.
Alternatively, users can employ staking-as-a-service platforms, allowing them to delegate their stake to a third-party service provider responsible for running a validator node. This approach offers a balance between control and convenience, allowing users to retain control over their funds while delegating the node's operation to a trusted service provider. Pooled staking, where users combine their stake with others, is another option, and we will delve further into this method.
Lastly, some cryptocurrency exchanges offer staking services to users, enabling them to stake their cryptocurrency without the need to run their own node or delegate to a third-party provider. This approach is the most convenient, but users should exercise caution and assess the exchange's security measures before staking their cryptocurrency on the platform.