What Is Staking? How Does It Work? Complete Guides 2024

Like a lot of things in crypto, staking can be a complicated idea or a simple one depending on how many levels of understanding you want to unlock. For a lot of crypto users, knowing that staking is a way of earning rewards while holding onto certain cryptocurrencies is the key takeaway. But even if you’re just looking to earn some staking rewards, it’s useful to understand at least a little bit about how and why it works the way it does. 

How does staking work?

If a cryptocurrency you own allows staking — current options include Ethereum, Tezos, Cosmos, Solana, Cardano and others — you can “stake” some of your holdings and earn a reward over time.

The reason your crypto earns rewards while staked is because the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of , which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process. 

in cryptocurrencies is a way to earn rewards for holding and supporting a blockchain network. It’s similar to, but not exactly like, earning interest on a traditional savings account. Here’s a breakdown of how it works:

Traditional Savings Account vs. Crypto

• Traditional: You deposit money into a bank, and the bank lends it out to others. You earn a small interest rate for allowing the bank to use your money.
• Crypto Staking: You lock up your crypto holdings on a blockchain network to help validate transactions and secure the network. In return, you earn rewards in the form of new cryptocurrency.

How Proof of Stake Works:

Many blockchains rely on a mechanism called “proof of stake” (PoS) to validate transactions and secure the network. Unlike “proof of work” (PoW) used in Bitcoin mining, which requires solving complex puzzles, PoS relies on coin holders to participate in the validation process.

• Validators: People who stake their crypto become validators. The more crypto a validator stakes, the greater the chance they have of being selected to validate a block of transactions.
• Block Validation: Selected validators verify if a new block of transactions is legitimate. They essentially act like auditors, ensuring the accuracy and security of the network.
• Rewards: For successfully validating a block, validators are rewarded with new cryptocurrency. These rewards come from transaction fees or by allocating a portion of newly created coins to validators.

Benefits of Staking:

• Earn Rewards: allows you to earn passive income on your cryptocurrency holdings.
• Secures the Network: By participating in , you contribute to the security and decentralization of the blockchain network.
• Low Barrier to Entry: often doesn’t require expensive hardware compared to proof-of-work mining.

Things to Consider Before :

• Staking Requirements: Different blockchains may have minimum staking amounts or specific wallet requirements.
• Locking Period: Some coins lock your staked holdings for a specific period, limiting your ability to trade them freely.
• Risks: The value of the cryptocurrency you stake can fluctuate, so there’s a risk of losing money. There’s also the possibility of technical risks associated with the blockchain itself.

Overall, can be a way to earn rewards on your crypto holdings while contributing to a blockchain network. However, it’s crucial to understand the risks and requirements involved before your crypto.

Why do only some cryptocurrencies have staking?

This is where it starts to get more technical. Bitcoin, for instance, doesn’t allow staking. To understand why, you need a little bit of background. 

• Cryptocurrencies are typically decentralized, meaning there is no central authority running the show. So how do all the computers in a decentralized network arrive at the correct answer without having it fed to them by a central authority like a bank or a credit-card company? They use a “consensus mechanism.” 
• Many cryptocurrencies — including Bitcoin and Ethereum 1.0 — use a consensus mechanism called Proof of Work. Via Proof of Work, the network throws a huge amount of processing power at solving problems like validating transactions between strangers on opposite sides of the planet and making sure nobody is trying to spend the same money twice. Part of the process involves “miners” all over the world competing to be the first to solve a cryptographic puzzle. The winner earns the right to add the latest “block” of verified transactions onto the blockchain — and receives some crypto in return. 

For a relatively simple blockchain like Bitcoin’s (which functions a lot like a bank’s ledger, tracking incoming and outgoing transactions) Proof of Work is a scalable solution. But for something more complex like Ethereum — which has a huge variety of applications including the whole world of DeFi running on top of the blockchain — Proof of Work can cause bottlenecks when there’s too much activity. As a result transaction times can be longer and fees can be higher.

Not all cryptocurrencies offer staking because they don’t all use the same consensus mechanism to validate transactions and secure their networks. Here’s a breakdown of why staking is specific to certain cryptocurrencies:

• Proof of Stake vs. Proof of Work:
  • Proof of Stake (PoS): This consensus mechanism relies on coin holders who stake their crypto to validate transactions. rewards incentivize participation in securing the network.
  • Proof of Work (PoW): This is the mechanism used by Bitcoin and some other cryptocurrencies. It requires miners to solve complex computational puzzles to validate transactions. Security is achieved through the immense computing power needed, not by staking.
• Cryptocurrencies with Staking: These cryptocurrencies typically use a Proof of Stake consensus mechanism. Examples include Ethereum (after the Merge), Solana, Cardano, and Polkadot.
• Cryptocurrencies without Staking: These cryptocurrencies often use Proof of Work or other mechanisms. Bitcoin, Litecoin, and Dogecoin are examples of PoW currencies that don’t utilize .

Choosing the Right Mechanism:

• Developers choose a consensus mechanism based on factors like scalability, security, and energy efficiency.
• Proof of Stake generally offers faster transaction processing and lower energy consumption compared to Proof of Work. However, it can introduce other considerations like the potential for centralization if a small number of users hold a large portion of the staked coins.

What is Proof of Stake?

A newer consensus mechanism called Proof of Stake has emerged — with the idea of  increasing speed and efficiency while lowering fees. A major way Proof of Stake reduces costs is by not requiring all those miners to churn through math problems, which is an energy-intensive process. Instead, transactions are validated by people who stake their tokens. 

• serves a similar function to mining, in that it’s the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange. Stakers also help establish which blocks are valid. 
• The exact implementations vary from project to project, but in essence, users vote their tokens to ensure the security of the blockchain. Their staked tokens act as a guarantee that they are acting in good faith and as a disincentive to violating the protocol rules.

What are the advantages of staking?

Many long-term crypto holders look at staking as a way of making their assets work for them by generating rewards, rather than collecting dust in their crypto wallets.

Staking is also a way to contribute to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions.

What are some staking risks?

Staking often requires a lockup or “vesting” period, where your crypto can’t be transferred for a certain period of time. This can be a drawback, as you won’t be able to trade staked tokens during this period even if prices shift. Before staking, it is important to research the specific staking requirements and rules for each project you are looking to get involved with.

How do I start staking?

Staking is generally open to anyone who wants to participate. That said, becoming a full validator can require a minimum number of tokens, technical knowledge, and a dedicated computer that can perform validations day or night without downtime. Participating on this level comes with security considerations and is a serious obligation, as downtime can cause a validator’s stake to become slashed.

But for the vast majority of participants there’s a simpler way to participate. Via an exchange like Coinbase, you can contribute any amount you wish, without needing to purchase or operate expensive validator hardware. Staking is available to most Coinbase customers in the U.S. and many other countries.

Here’s a roadmap to get you started with staking cryptocurrencies:

1. Choose a Staking Platform:

• There are two main ways to stake crypto:
  • Staking directly on a cryptocurrency exchange: Many exchanges offer staking services. This is a convenient option for beginners, but the variety of coins you can stake might be limited, and you may not be in control of your own staked assets.
  • Staking through a crypto wallet: This method gives you more control over your staked holdings but requires you to choose a compatible wallet and potentially interact with a blockchain directly.
• Research and compare staking platforms: Consider factors like security, supported coins, staking requirements (minimum amounts, locking periods), fees, and rewards offered before choosing a platform.

2. Select a Staking Coin:

• Not all cryptocurrencies support staking. Focus on coins that use a Proof of Stake consensus mechanism.
• Research the coin’s potential, staking rewards, and associated risks (volatility, locking periods, etc.).

3. Transfer Your Crypto:

• Once you’ve chosen a platform and coin, transfer the crypto you want to stake to the chosen platform or wallet.

4. Start Staking:

• Follow the platform’s instructions to initiate staking. This might involve selecting a staking pool or validator node.

Here are some additional things to keep in mind:

• Security: Choose a reputable platform with strong security measures to protect your staked crypto.
• Fees: Understand any fees associated with staking, such as platform fees or network transaction fees.
• Taxes: Staking rewards may be considered taxable income in some jurisdictions. Consult a tax professional for guidance.
• Volatility: The value of your staked crypto can fluctuate. Be prepared for potential losses.

Staking can be a rewarding way to earn passive income on your crypto holdings, but it’s important to approach it cautiously. Do your research, understand the risks, and choose a reputable platform before getting started.

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