What is Staking? If you search the general meaning of ‘staking’: something is at risk. Or else, something might be lost or damaged if you are not successful. But in the crypto world ‘what is staking’ becomes something else. Our Desi Airdrops Blog representing the detail view on Staking.
Let’s talk about it!
Introduction to Staking
First of all, all of you know the process of Fixed Deposit or Recurring Deposit in Government and Private banks. This is nothing but to hold your own money in your bank account in the form of a Fixed or Recurring deposit. Thus, after a certain period of time, you will get a handsome amount of money that you invested as a fixed or recurring deposit. Actually, the banks are giving away some interest in what you have deposited. And that amount of interest varies depends on the bank.
Now, if you look into the crypto world. There is also a new way to utilize your cryptocurrency– named as ‘Staking.’ This is also a process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Basically, it consists of locking cryptocurrencies to receive rewards. In most cases, the process relies on users participating in blockchain activities. And the activities have happened through a personal crypto wallet, such as Trust Wallet.
The concept of staking is closely related to the Proof of Stake (PoS) mechanism. It is used in many blockchains that are based on PoS or one of its many variants.
Creation of ‘Proof of Stake’
Proof of Stake was first created in 2012 by two developers called Scott Nadal and Sunny King. At the time of its launch, the founders argued that Bitcoin and its Proof of Work model required the equivalent of $150,000 in daily electricity costs.
But, the first-ever blockchain project to use the Proof of Stake model was Peercoin. The initial benefits include a fairer and more equal mining system. Moreover, scalable transactions and less reliance on electricity.
In 2014, Daniel Larimer developed the so-called Delegated Proof of Stake (DPoS) mechanism. It was first used as part of the Bitshares network. But other cryptocurrencies adopted the same model. Notably, Larimer also created Steem and EOS, which also adopt the DPoS model.
DPoS allows users to commit their balances as votes. These are used to elect a certain number of delegates. Then, the elected delegates manage the blockchain operations on behalf of their voters, ensuring security and consensus. Also, stakeholders are able to stake their coins, receiving periodic rewards for holding funds.
Work Method of ‘Staking’
Already we have discussed, staking is the process of holding funds to receive rewards while contributing to the operations of a blockchain. Thus, staking is widely used for networks that adopt the Proof of Stake (PoS) consensus mechanism or one of its variants.
In the case of, Proof of Work (PoW) blockchains that rely on mining to verify and validate new blocks. But PoS chains produce and validate new blocks depends on coin’s age. In a word, how long the coins are being locked or staked- along with the randomization factor. This allows for blocks to be produced without relying on mining hardware (ASICs). So, instead of competing for the next block with heavy computation work, PoS validators are selected based on the number of coins they are committing to stake.
Typically, users that stake larger amounts of coins have a higher chance to be selected as the next block validator. While ASICs mining requires a significant investment in hardware, staking requires a direct investment (and commitment) in the cryptocurrency. Each PoS blockchain has its particular staking currency. The production of blocks via staking enables a higher degree of scalability.
Some chains adopt the Delegated Proof of Staking (DPoS) model. It allows users to simply signal their support through other participants of the network. In other words, a trusted participant works on behalf of users during decision-making events.
The delegated validators (nodes) are the ones that handle the major operations and overall governance of a blockchain network. They participate in the processes of reaching consensus and defining key governance parameters.
For some networks, staking rewards are determined as a fixed percentage ‘inflation’ rate. This encourages individuals to utilize their coins (rather than only HODL means hold). This process reduces the operational costs of the network to all token holders.
As an example, Stellar distributes its inflation weekly to users. They are staking their coins through a staking pool. One benefit of this approach is that the network can disburse a fixed or controlled interest rate.
<A staking pool is formed when several coin holders merge their resources to increase their chances of validating blocks. And also able to receive rewards. They combine their staking power and share the eventual block rewards proportionally to their individual contributions.>
As a result, if a user holds 10,000 XLM for one year and specifies an inflation destination on-chain by signing a transaction. They should expect to earn 100 XLM in rewards. That would happen over the course of a year at a balanced inflation rate of 1% (ignoring compounding effects).
Furthermore, the information can be displayed to all network users who are deciding whether or not to stake. Thus, it could increase the number of new stakers. Because it provides a predictable reward schedule rather than a probabilistic chance of receiving a block reward.
Hopefully, we are able to clear the concept of what is staking. There are more options for users to participate financially in the consensus and governance of blockchains. The growth of staking will likely lower the barriers to entry to the crypto world, indeed. This is one of the reasons the Ethereum network will eventually migrate from PoW to PoS. In the near future, all the networks will adopt the PoS consensus algorithm.
Writer, researcher, and analyst on cryptocurrency and blockchain technology at L&P Digitech Pvt. Ltd. Also managing the content with SEO at this current company. Keen interest to know more about new technologies related to the crypto world and blockchain technology. Completed Masters in Computer Application (MCA) and holds Post Graduate Diploma in Instructional Designing with sound knowledge in Articulate3. Out of all, love to travel, listen to music, and to eat also.