What is Staking Crypto and How Does it Work

What is Staking Crypto and How Does it Work?

Staking is the process of actively participating in transaction validation on a proof-of-stake (PoS) blockchain. You may think of staking as a less resource-intensive alternative to mining. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn Staking rewards. Simply put, staking is the act of locking cryptocurrencies to receive a reward.

Some blockchain protocols allow participants to earn additional cryptocurrency by participating in the network's staking process. The most popular cryptocurrency to use proof-of-stake are Ethereum and Solana.

How does Staking work?

Proof of Stake chains produce and validate new blocks through the process of staking. Staking involves validators who lock up their coins, so they can be randomly selected by the protocol at specific intervals to create a block. Usually, participants that stake larger amounts have a higher chance of being chosen as the next block validator.

  1. When the minimum balance is met, a node deposits that amount of cryptocurrency into the network as a stake (similar to a security deposit).
  2. The size of a stake is directly proportional to the chances of that node being chosen to forge the next block.
  3. If the node successfully creates a block, the validator receives a reward, similar to how a miner is rewarded in proof-of-work chains.

Most networks pay the staking reward in their particular staking currency, but some networks adopt a two-token system where the rewards are paid in a second token.

On a very practical level, staking just means keeping funds in a suitable wallet. This enables essentially anyone to perform various network functions in return for staking rewards.

How are the rewards calculated?

Each blockchain network may use a different way of calculating staking rewards. Some are adjusted on a block-by-block basis, taking into account many factors. These can include:

  • The amount of coins, the validator is staking
  • How long the validator has been actively staking
  • How many coins are staked on the network in total
  • The inflation rate

For some other networks, staking rewards are determined as a fixed percentage. These rewards are distributed to validators as a sort of compensation for inflation.

Why stake with Bitbuy?

  • Earn some of the highest staking rewards in Canada.
  • Your crypto assets are held 1:1 and are not used for lending (See our latest Proof of Reserves audit)
  • Unstake your crypto and withdraw anytime*

*Please note: staked Ethereum cannot be unstaked until the Shanghai network upgrade, predicted to launch in 2023.

Are there any risks with staking? Where does the yield come from?

Crypto staking is considered to be much safer than crypto lending. While lending involves credit risks, staking rewards comes directly from the blockchain protocol. This generally means less counter-party risks, as your reward comes from the issuance of new coins, rather than trusting someone to pay back a loan.

Bitbuy partnered with an industry-leading crypto custodian and blockchain infrastructure provider. We hold all staked assets at a 1:1 ratio. You can see our latest Proof of Reserves audit here.

The biggest risk with staking is usually slashing, which means missed rewards as a result of infrastructure downtime or validator misbehaviour. To prevent slashing, Bitbuy has partnered with thoroughly vetted industry leading infrastructure providers like Figment, and have designed our systems and processes to greatly reduce the likelihood of a slashing event.

Bitbuy Staking is now live! Visit bitbuy.ca/staking for more details or check out the Staking tab when you are logged in.

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