Lesson 13 – What is staking?

Cryptocurrency mining – once exclusive to Bitcoin (BTC) – has evolved with the emergence of new cryptocurrencies adopting Proof-of-Stake (PoS) algorithms instead of Bitcoin’s energy-intensive Proof-of-Work (PoW) algorithm.

What is a staking process?

Staking refers to securing one’s crypto assets in a Proof-of-Stake blockchain for a certain period to achieve consensus and maintain network integrity. It also verifies the validity of each new transaction added to the blockchain. Validators, also known as “participants”, validate the transaction and are rewarded with new coins of the underlying cryptocurrency for locking in their assets and contributing to the blockchain process.

To run a successful validation node, participants must commit to a specific blockchain, provide secure and continuously available infrastructure, and meet certain minimum requirements. Some blockchains require a certain lock-in period during which validators cannot access their coins. In addition, there may be certain minimum requirements in terms of the amount of coins that are in use.

To avoid these requirements, some cryptocurrency owners prefer delegating their coins to another validator who operates what is known as a staking pool. This validator manages the process and shares the rewards with its delegators, typically charging a fee for their services.

Each PoS-based blockchain has its own rules and requirements for its validators. These rules define the technical and financial hurdles to become a validator. The amount of reward a validator receives varies based on factors like their actual participation in the consensus mechanism and the total sum of coins employed.

Choosing the right coin or token is crucial. Historical returns, the blockchain’s technical capabilities, and its future development prospectsplay a significant role in this decision. The locking period (if any) and technical knowledge required for staking are also important criteria to consider.