Staking has become a popular way for crypto investors to grow their holdings without having to sell their digital assets. Staking can be seen as the crypto equivalent of putting your funds in a savings account. The difference is that, when you deposit money in your savings account, the bank ends it out to others, sharing the interest with you. When you stake your crypto, you lock up your digital assets to participate in maintaining the security of a blockchain network, earning rewards in return.
You can think of staking crypto as a less resource-intensive alternative to mining. It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. Simply put, staking is the act of locking up cryptocurrencies to receive rewards.
In most cases, you’ll be able to stake your coins directly from your crypto wallet, such as Trust Wallet. On the other hand, many exchanges offer staking services to their users. Binance Staking lets you earn rewards in a simple way – all you have to do is hold your coins on the exchange (more on this below).
To get a better grasp of what crypto staking is, you’ll first need to understand how the proof of stake (PoS) consensus mechanism works. PoS allows blockchains to operate more energy-efficiently while maintaining a solid degree of decentralization, at least in theory. Let’s dive into what PoS is and how crypto staking works.
What is proof of stake (PoS)?
If you know how Bitcoin works, you’re probably familiar with proof of work (PoW). Under this mechanism, miners record transactions into blocks and compete to solve complex mathematical puzzles, expanding computing resources to have a chance to add the next block to the chain.
Proof of work has proven to be a very robust mechanism to facilitate consensus in a decentralized manner. The problem is that it involves a lot of arbitrary computation. The puzzle the miners are competing to solve serves no purpose other than keeping the network secure. Many believe that this in itself makes the excess of computation justifiable. However, it is also fair to ask: are there ways to maintain decentralized consensus without the high computational cost?
Enter proof of stake. The main idea is that participants can lock coins (their “stake”), and at particular intervals, the protocol randomly assigns the right to one of them to validate the next block. Typically, the probability of being chosen is proportional to the amount of coins – the more coins locked up, the higher the chances.
This way, what determines which participants create a block isn’t based on their ability to solve hash challenges, as it is the case with proof of work. Instead, it’s determined by how many coins they are holding.
Some might argue that the production of blocks through staking enables a higher degree of scalability for blockchains. This is one of the reasons the Ethereum network has migrated from PoW to PoS in a set of technical upgrades collectively referred to as ETH 2.0.
Who created proof of stake?
One of the early descriptions of a proof of stake mechanism was offered by Sunny King and Scott Nadal in their 2012 paper. They describe it as a “peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin.”
The Peercoin network the two described was launched with a hybrid PoW/PoS mechanism, where PoW was mainly used to mint the initial supply of coins. However, it wasn’t required for the long-term sustainability of the network, and its significance was gradually reduced. In fact, most of the network’s security process relied on PoS.
What is delegated proof of stake (DPoS)?
An alternative version of this mechanism, called Delegated Proof of Stake (DPoS), was developed in 2014 by Daniel Larimer. It was first used as a part of the BitShares blockchain, but soon after, other networks adopted the model. These include Steem and EOS, which were also created by Larimer.
DPoS allows users to commit their coin balances as votes, where voting power is proportional to the number of coins held. These votes are then used to elect a number of delegates who manage the blockchain on behalf of their voters, ensuring security and consensus. Typically, the staking rewards are distributed to these elected delegates, who then redistribute part of the rewards to their electors proportionally to their individual contributions.
The DPoS model allows for consensus to be achieved with a lower number of validating nodes. As such, it tends to enhance network performance. On the other hand, it may also result in a lower degree of decentralization as the network relies on a small, select group of validating nodes. These validating nodes handle the operations and overall governance of the blockchain. They participate in the processes of reaching consensus and defining key governance parameters.
Simply put, DPoS allows users to exercise their influence through other participants of the network.
How does staking work?
As we’ve discussed before, proof-of-work systems rely on mining to add new blocks to the blockchain. In contrast, proof-of-stake chains produce and validate new blocks through the process of staking, where validators who lock up their coins 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.
This allows for blocks to be produced without relying on specialized mining hardware, such as ASICs. While ASIC mining requires a significant investment in hardware, staking requires a direct investment in the cryptocurrency itself. So, instead of competing for the next block with computational work, PoS validators are selected based on the number of coins they are staking. The “stake” (the coin holding) is what incentivizes validators to maintain network security. If they fail to do that, their entire stake might be at risk.
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. It may also include adding funds to a staking pool, which we’ll cover shortly.
How are staking rewards calculated?
There’s no short answer here. 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 different factors. These can include:
how many 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. Inflation encourages users to spend their coins instead of holding them, which may increase their usage as cryptocurrency. But with this model, validators can calculate exactly what staking reward they can expect.
A predictable reward schedule rather than a probabilistic chance of receiving a block reward may look favorable to some. And since this is public information, it might incentivize more participants to get involved in staking.
What is a staking pool?
A staking pool is a group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the rewards proportionally to their contributions to the pool.
Setting up and maintaining a staking pool often requires a lot of time and expertise. Staking pools tend to be the most effective on networks where the barrier of entry (technical or financial) is relatively high. As such, many pool providers charge a fee from the staking rewards that are distributed to participants.
Furthermore, pools may provide additional flexibility for individual stakers. Typically, the stake has to be locked for a fixed period and usually has a withdrawal or unbinding time set by the protocol. What’s more, there’s almost certainly a substantial minimum balance required to stake to disincentivize malicious behavior.
Most staking pools require a low minimum balance and append no additional withdrawal times. As such, joining a staking pool instead of staking solo might be ideal for new users.
What is cold staking?
Cold staking refers to the process of staking on a wallet that’s not connected to the Internet. This may be done using a hardware wallet, but it’s also possible with an air-gapped software wallet.
Networks that support cold staking allow users to stake while securely holding their funds offline. It’s worth noting that if the stakeholder moves their coins out of cold storage, they’ll stop receiving rewards.
Cold staking is particularly useful for large stakeholders who want to ensure maximum protection of their funds while supporting the network.
Why don't all cryptocurrencies have staking?
Whether a blockchain network uses staking or not depends on its consensus mechanism. The consensus mechanism dictates who has power in the network to confirm and validate submitted transactions. In proof-of-work systems, validators race to complete computational puzzles in a process known as mining.
As you can see, on a proof-of-work network like Bitcoin, staking isn’t part of the block generation process. Nowadays, most networks will use a form of proof of stake, making it easily the most common mechanism in action. However, it’s worth remembering that not every network uses staking.
How to stake on Binance
In a way, you could think of holding your coins on Binance Earn - Locked Staking as adding them to a staking pool. However, there are no fees, and you have over 100 different cryptocurrencies to choose from!
Staking crypto opens up more avenues for anyone wishing to participate in the maintenance and governance of blockchains. What’s more, it’s an easy way to earn by simply holding digital assets. As it’s getting increasingly easy to stake, the barriers to entry to the blockchain ecosystem are getting lower.
It’s worth keeping in mind, though, that staking isn’t entirely without risk. Smart contracts used to lock up funds can be prone to bugs, so it’s always important to DYOR and use high-quality wallets, such as Trust Wallet.
Be sure to check out our staking page to see which coins are supported for staking and start earning rewards today!