What is Staking | Staking Series #1
What is Staking | Staking Series 1
- There are two famous consensus algorithms in the blockchain space, the Proof of Work (POW) and Proof of Stake (POS) algorithm which is getting more famous in the last years as Ethereum (2.0) is moving to POS and as it is more environmentally friendly. Most of the newer layer 1 blockchains, like Solana, Polkadot or Avalanche are using also the Proof-of-Stake consensus algorithm.
What is Staking?
- You can explain Staking (Proof-of-Stake) as a mechanism where you delegate your stake or tokens to a validator address and in return your receive rewards for that action. Receiving Staking rewards is one important part of the Proof-of-Stake consensus mechanism. But more important is that you secure the network by locking up your tokens for a certain time. If you put these two components together, staking means:
Token holders are rewarded for securing the Proof of Stake network by delegating to a validator.
- The amount of the locked-up tokens are also important. The bigger your staked token amount is, the higher your rewards will be. The token rewards are distributed on-chain, which means the process of earning these rewards is completely automatic and done via a smart contract, no humans are involved directly.
- Your task is to manage the wallet where you store the POS tokens and delegate them to one of the trustworthy Staking Providers.
- You will find an extensive list of global acting Staking Providers here.
By using staking you can grow your token amount while sleeping!
How can I earn the staking rewards?
- Looking at the structure of a blockchain due to the consensus mechanism new blocks are created in a certain timeframe, that can range from milliseconds to minutes. Every time a new block is validated by a validator new native tokens of that blockchain is minted (meaning created) and distributed as staking rewards to the participants.
- Participants are the delegators (delegates the tokens) and validators (receives the delegation).
- There a different Proof-of-Stake (PoS) networks on the market and a lot of new are coming in the next months and years. Below you will find some of the famost POS protocols:
Here you will find a detailed list of all important POS networks.
Two types of rewards
- There are two types of rewards that can get distributed.
1. Rewards for Staking = inflationary rewards
2. Transaction fees
Rewards for Staking
- You stake your digital assets or tokens with a POS node (a server running the protocol stack) to validate a block of transactions. The node you have delegated to should sign transactions or attest to blocks. For that this process, you will receive staking earning or staking rewards.
- By participating in staking you will increase the amount of the tokens of a certain network.
- Where is reward there is always also risk involved. The risks in the staking process are called slashing.
- If the validator/node is not responsive (down time of the server or infrastructure) or the validator tries to do a double-spending / double-signing transaction (malicious behavior) a portion of the staked assets can get slashed or even destroyed. This depends on the conditions of the network.
- In the end, are staking rewards an incentive for the validators or nodes to do their work. The nodes need to order the transactions, verifying them, collecting them in a block, and subsequently validating the next block. The rewards for that kind of work are freshly minted native blockchain tokens and you can call them inflationary rewards.
Good to know:
- Additionally, validators are selected randomly to create the block.
- The probability of a validator’s selection is directly proportional to the volume of crypto-assets staked. The bigger the better.
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- As extension to the staking rewards, each transaction carries with itself a small transaction fee for making it easier for the nodes/validators to structure and prioritize the selection of the next transactions and entered them into the block. These fees are accumulated from the underlying transactions. The fees are also received by the nodes.
- Depending on the Proof-of-Stake network the different transactions can be created for different things. There is a range from token transfers to smart contract executions.
If Proof-of-Stake were a democracy, your stake in the network would be like voting right!
Delegation to a validator
- By running a own validation infrastructure you need to have a good technical understanding and you need top-notch hardware (or cloud service) and money for running it. Private investors or consumers do in general not run a validator node by themself. More than 90% do a delegation to one of the professional validator nodes.
- The process of staking your assets with a validator without actually sending them your tokens is commonly called delegation.
- Delegating your assets means letting them count towards the stake of a validator in return for a share of the reward received. In practice, a delegator deposits tokens in a smart contract specifying the validator whose influence in the network she wants to increase.
- The rewards that the validator receives are split between validators and delegators by are rate which was defined before. We see numbers from 1% – 20% on the market.
Summary – What is Staking | Staking Series 1:
- We see a clear trend to Proof-of-Stake networks in the blockchain industry, among other things it is driven by the environmentally friendly consensus approach.
- Staking means as a token holder you get rewarded for securing the Proof of Stake network by delegating your assets to a validator. Securing the network is an important task and it is fair that staking is incentivised by the network.
- There are different layer 1 blockchains with the Proof-of-Stake approach and we are sure that we will see a lot of more coming in the next years. Also the biggest smart contract platform Ethereum is moving to POS with Ethereum 2.0.
- In the next Staking Series we will share more valuable information about delegation, the selection of the right staking provider and diving deeper into the most famous Proof-of-Stake networks. Moreover, we share our Staking Provider and Staking Network map and database 2021.
Enjoy your Proof-of-Stake / Staking journey with DezentralizedFinance.com!
- Find more valuable information about our Staking Providers and Staking Networks at DezentralizedFinance.com.
- RISK DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article’s content solely reflects the opinion of the writer, who is not a financial advisor. Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value, also to zero. Holding cryptocurrencies is very risky.