If you put something at stake you usually risk losing it, in colloquial language. In the world of cryptocurrency consensus mechanisms though, staking stands for abstaining from using one’s funds for a time to secure oneself a better chance to process the next blockchain block.
We have a lot more to tell on the topic. What is staking in crypto? How it became possible and why? Is it an effective way to earn?
What is crypto staking: the underlying technology
Immediately after the release of Bitcoin, the only way to earn coins was by mining (unless you earned them by selling goods or services). Faucets and casinos followed later.
Mining algorithms are the core of crypto. It is not a big deal to broadcast a transaction to all the network participants – keeping an orderly decentralized record of all transactions is problematic. On top of that, some authority must make a decision on who adds that record and gets a block reward. The algorithm takes care of both problems.
In case with Bitcoin, the chance to win a block reward is increased with the amount of computing power a participant’s hardware has put into solving a SHA-256 cryptographic puzzle. Such an approach is called a proof-of-work consensus mechanism.
What is crypto staking: where does PoS come from?
As time went on and Bitcoin grew, miners started to invest tremendous amounts of money into their hardware. The total network hashrate grew tremendously and so did the energy consumption of mining.
The first solution to the problem of excessive energy consumption appeared quite early, in 2012, with PeerCoin (PPC) blockchain. It implemented a hybrid proof-of-work / proof-of-stake algorithm as an alternative to energy-hungry PoW.
The idea behind PoS is that miners don’t have to spend money, time, AND energy to secure the network and ensure decentralized coin emission. The amount of staked coins determines a miner’s chance to write the next block. The share of PoS coins grows day by day compared to the PoW ones, by the way.
There are other protocols. The industry does not stand still so you will come across proof-of-authority, proof-of-burn, etc – the working ones and those only outlined in theory.
What is staking crypto beside PoS mining
There is no single answer to, ‘What is staking in cryptocurrency’. We just briefly mentioned PoS mining but Decentralized Finance services allow every user to participate in a variety of different ways. One can stake coins in various DeFi services: exchanges, lending plaforms, or blockchain games.
As for staking as a consensus mechanism, it serves the network in the following ways:
What is staking crypto: security
One of the known (and intentional) blockchain security strengths is decentralization. It doesn’t make blockchain 100% secure yet cracking it is extremely hard and unlikely.
Blockchain is a decentralized ledger. Every user keeps a record of the network state. Provided that every user in the network is unique, a cheater would have to break into accounts of at least 50% network users to create a fake transaction and “persuade” the rest of the network that the transaction is legit. Even if the whole operation succeeds, it will ruin a coin price, so it is always economically unreasonable.
This is otherwise known as the 51% attack. So, the more unique users have their stake in the network, the more secure it is.
What is staking crypto: performance
Network speed comes at a price: not only a staker must have invested a significant sum into their share of coins but the validator node must correspond to a number of requirements.
Depending on the mining algorithm, the nodes may be required to have no less than 500GB disk space (preferably SSD), 16GB DDR4 RAM, mid to top tier GPU or an expensive 24-thread CPU one would hardly need otherwise.
A higher stake allows miners to make the most of their hardware.
What is staking in crypto: coin emission
The point of cryptocurrencies is to get rid of a central authority that singlehandedly controls emission and collects fees. As a rule, miners add fresh coins to a PoS network with each block they process. The higher their share, the more often they will be chosen to add a block.
It is important to distinguish coins from tokens. The team behind a certain token may program its smart contract however they like. They may declare the whole token stock in their possession or, on the contrary, share the privilege of minting new tokens with the community or evenly distribute tokens through airdrops.
What does staking mean in crypto
Staking creates a higher demand for a certain asset, from an economic perspective. If we are talking about a coin or token, staking is meant to stabilize and increase its value over time. Although new coins are being mined daily, the users are discouraged to release them into circulation immediately.
Token economy of other projects might be as intricate or plain as its creators want. Regardless of whether the supply is capped or uncapped, there must be a way of distributing the tokens between the interested parties (large investors, the team, early supporters, other users…). The team could simulate token “mining”, just put most tokens on sale, and airdrop the rest of them.
Because staking also brings token holders specific scalable benefits, they would be motivated to buy and hold larger quantities. As they do so, they create scarcity on the market and benefit from increasing token price too.
What does staking mean in crypto: summary
What else to add? Buy early, buy some more during the bear market, and stake for years! That will work for projects that bring some value to the community and grow. As for the scams, learn to distinguish them and, obviously, stay away.
Crypto staking explained!