What is Staking?

What is Staking?

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 contributing to the network. These rewards can be earned in many ways, including staking. On the other hand, many exchanges offer staking services to their users. The most popular cryptocurrency to use proof-of-stake will be Ethereum 2.0 and the transition is expected to happen by the end of 2021.

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.

While each Proof of Stake blockchain has its particular staking currency, 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.

Bitbuy does not offer staking or staking rewards at this time.