Several fundamental concepts drive the underlying mechanism when discussing blockchain technology and its related cryptocurrencies. One of these is coins staking. But what is crypto staking? And how can users learn how to stake coins to earn crypto? This article examines staking in the depot to provide an easy-to-understand answer to ‘what is staking.’
Crypto staking is a form of earning cryptocurrency simply by holding it. It is made possible by the structure of the blockchain. As every transaction on the blockchain requires verification – this rewards-type system helps users who have cryptocurrency to verify transactions and support the network essentially earn crypto.
How Does Crypto Staking Work?
Staking is an alternative to crypto mining. It consists of holding cryptocurrency in a digital wallet to support a specific blockchain network’s security and operations. By ‘locking’ or putting away the cryptocurrencies, users can receive staking rewards.
In most cases, staking coins can be done directly from your crypto wallet, although it is also possible to do so through one of the services offered by crypto exchanges. The crypto exchange Binance, for example, provides a staking option that lets users earn rewards in a simple way – all you have to do is hold your coins on the exchange.
To fully understand what is staking and the staking tool used, you need to grasp how Proof of Stake (PoS) works. PoS is a consensus mechanism that allows blockchain to operate more energy-efficiently and eco-friendly while maintaining their decentralization degree (at least, in theory). Let’s look at what PoS is and how staking works more closely.
Is Staking the Same as Yield Farming?
It’s a similar concept. But it’s different from one another. Staking involves validators to lock up their coins based on the PoS consensus algorithm. While yield farming boasts of the lending pool that allows the token holders to generate passive income in exchange for the interest rate. When comparing staking and yield farming, staking is less risky.
What Is Proof of Stake?
Proof of Stake (PoS) is a consensus algorithm for blockchain networks based on random validators among the community of users, who “stake” the native network’s tokens or coins by locking them into the blockchain. They do this to produce and approve blocks. The users who act as validators are rewarded based on their total stake, incentivizing nodes to validate the network based on a return on investment (ROI).
PoS is considered the greener and more scalable version of the original Proof of Work (PoW) consensus used in Bitcoin’s blockchain. As it does not rely on as much arbitrary computation as PoW does.
Rather than solving complex mathematical puzzles to keep the network secure, the PoS mechanism incentivizes (or stimulates) users to strengthen the blockchain network in exchange for a reward in the form of crypto. This reward also serves as an interest. The PoS mechanism allows users to generate a passive income only by holding coins as they earn crypto.
Typically, validators are selected to produce the next block based on the size and the average period it holds of their stake. Although there are other functions to prevent a front-running consensus, a larger stake usually gives users a higher chance of producing the blockchain’s next block. Proposed blocks by validators are then propagated to the rest of the set, who verify and add the blockchain’s approved block.
What Is A Delegated Proof of Stake?
Delegated Proof Of Stake (DPoS) is another consensus algorithm that expands on the fundamental concepts of Proof Of Stake. Developed by Daniel Larimer, founder of BitShares, Steemit, and EOS in 2014, it differs from traditional consensus mechanisms.
Unlike the Proof of Stake (PoS) mechanism, where validators are chosen randomly and based on their stake size, under the DPoS mechanism – coin holders vote for “delegates,” responsible for validating transactions and maintaining the blockchain. DPoS is an alternative to the more commonly known, Proof-of-Stake (PoS) model, as it requires stakeholders to elect what is known as witnesses.
These witnesses are responsible and rewarded for generating and adding blocks to the blockchain. Each stakeholder is allowed only one vote per witness, with witnesses with the most votes being elected. Stakeholders can vote for as many witnesses as they wish, provided that at least 50% of the stakeholders believe sufficient decentralization has been achieved through the number of elected witnesses. The voting for witnesses is an on-going process. This provides the incentive for witnesses to carry out their function to the highest standard or risk losing their position. There is an additional reputation scoring system built into the network to assist stakeholders in better assessing the quality of witnesses.
When a cryptocurrency relies on the DPoS consensus, a chosen group of witnesses is replaced. May it be at a fixed time, once a day or once a week. That is to ensure each witness receives a turn to produce a block. If they fail to do so within the allocated time, it typically results in a witness being skipped and negatively affecting their reputation score.
Besides, there are other participants known as delegates. Delegates are elected similarly to witnesses. They are responsible for maintaining the network and can propose changes that need to be voted. Once these changes have been submitted, it is then up to the stakeholders to vote whether the proposed changes should be implemented. Whether or not a reward incentive system exists for delegates will vary depending on the implementation of the DPoS consensus mechanism.
Additionally, the DPoS mechanism requires that users also vote for a group of delegates who oversee blockchain governance. Although delegates do not play a part in transaction control, they can propose changing the block’s size and the amount a witness should be paid in return for validating a block. The blockchain’s users can then vote on the changes proposed by the delegates.