What is crypto staking?
Summary of crypto staking
- Crypto staking allows people that own certain types of cryptocurrencies to earn rewards for helping to validate transactions added to a blockchain network.
- Staking allows individuals to earn rewards on the cryptocurrency they hold without having to sell their assets.
- Staking rewards are typically paid out in the same token that a person stakes.
- There are different types of crypto staking, including proof-of-stake (PoS) and delegated-proof-of-stake (DPoS)
The staking process serves two purposes:
- Maintaining the integrity of past information stored on the blockchain
- Ensuring the accuracy of new information as it is added to the blockchain
Ultimately, the staking process utilizes a series of incentives and penalties to operate. These incentives, which are carried out in a decentralized system, are based on a series of auditable rules that anyone can observe.
The protocol rewards honest stakers for their help in maintaining the network.
Those that attempt to behave dishonestly are identified thanks to the transparent nature of blockchains.
Anyone who tries to record fraudulent information on the blockchain, or tamper with past transactions, can have their staked cryptocurrency taken away. The protocol can execute this penalty automatically through a process known as slashing.
Stakers who behave honestly and contribute to the security of the network are eligible to earn rewards in the form of additional units of cryptocurrency. The amount of rewards stakers can earn is set by the blockchain protocol itself and is typically related to the amount they stake.
However, most protocols include some degree of randomness to ensure even those staking a small amount can earn rewards too.
Staking rewards are often paid out in the same form of cryptocurrency used as staking collateral. For example, when staking DOT on the Polkadot blockchain, stakers receive DOT in return for their contributions.
A more complete list of all assets available for staking on Kraken can be found here.
Why stake cryptocurrency?
Stakers are able to earn rewards on their cryptocurrency holdings while helping to secure a protocol.
Staking is a relatively simple way to participate in the long term maintenance of a blockchain network.
Here are some of the reasons why people stake cryptocurrencies:
- Stakers earn rewards. By staking your digital assets on a proof-of-stake (PoS) blockchain for a period of time, stakers can earn rewards on their crypto holdings.
- Staking helps secure the network. Many crypto holders believe that staking is a great way to support the projects they believe in, while also helping to secure the blockchain network.
- Staking is easy. Staking can simply be a set it and leave it way to earn rewards on your crypto.
How does crypto staking work?
Crypto staking is a fundamental process of the proof-of-stake (PoS) consensus mechanism.
Consensus mechanisms incentivize network participants to collectively act in the best interests of the network and follow the rules, while also helping to dissuade malicious behavior.
Proof-of-work (PoW) blockchains rely on cryptocurrency miners, who compete to produce winning hash codes using computational power in a process known as cryptocurrency mining.
If you are interested in learning more about crypto staking and crypto mining, as well as the tradeoffs of both consensus mechanisms, you can check out the Kraken Learn Center article Proof of Work vs. Proof of Stake: The Beginner’s Guide.
Rather than the outright competition of PoW, PoS blockchains follow a different approach. Instead of competing against others to validate a block of transactions, PoS validates are chosen to validate transactions on behalf of the network.
Just as there is a direct relationship between the amount of computational power a miner has and their chances of mining a block, there is a direct relationship between the number of coins an individual has staked and their likelihood of being selected to validate new transactions.
Many PoS protocols require a minimum amount of tokens to be staked in order to be eligible to validate a block of transactions. For example, the Ethereum blockchain requires 32 ether (ETH) to be staked before activating a validator node on the network.
How are stakers selected?
PoS protocols select validators to create new blocks based on different sets of criteria, including:
Staking wallet balance
The more cryptocurrency a validator stakes, the more likely they are to be chosen to validate a block of transactions.
Many protocols build in some degree of randomness to ensure those staking a small balance also have a chance to earn rewards.
However, the primary factor the protocol considers when selecting a staker is the amount of native cryptocurrency they are actively staking.
Randomized block selection
As mentioned above, there is some degree of randomness in the selection process to ensure all participants have a chance to earn a reward for validating transactions.
PoS blockchains typically create this randomness through the use of cryptographic techniques. This process is somewhat predictable, as the size of each stake is publicly available.
Generally, when holders stake tokens for a longer duration, they stand a higher chance of being chosen to create new blocks.
Known as “coin age,” it is calculated by multiplying the number of staked coins committed to a protocol by the number of days that a person has staked the assets.
When a node validates a block of transactions, its coin age is reset.
Different types of staking
Proof of stake
Proof-of-stake is a relatively new type of consensus mechanism first implemented successfully by Sunny King and Scott Nadal in 2012. Together, they created Peercoin (PPCoin), which was the first cryptocurrency to implement the proof-of-stake mechanism. Peercoin aimed to address the energy-intensive mining process of proof-of-work (PoW) consensus used by Bitcoin and other early cryptocurrencies.
The idea behind a PoS protocol is that holders of a cryptocurrency would be most incentivized to make sure the blockchain worked as intended. Those with the most tokens associated with a blockchain network would have the most to lose if the blockchain did not work as intended or contained fraudulent transactions.
Using a set of factors determined by the protocol, the PoS algorithm selects a node — a computer on the network that is approved to oversee the network’s distributed ledger — to propose the next block to the blockchain and validate transactions.
Generally, when a node is selected, its role is to ensure the validity of the transactions within the block, sign it and propose the block to the network for validation. The result, then, is the need to stake tokens on the blockchain and to gain rewards for doing so.
Further, unlike the outright competition of proof-of-work, the proof-of-stake consensus mechanism requires participants to deposit an amount of native token of the blockchain as collateral. This incentivizes validators to behave honestly and ensures the accuracy of information committed to the blockchain network.
Delegated proof of stake (DPoS)
Delegated-proof-of-stake (DPoS) represents an evolution of the original PoS consensus method. DPoS allows users of the network to vote and elect delegates, also called witnesses or block producers, to validate the next block. Token holders can choose which delegate they would like to stake their cryptocurrency with in exchange for a proportional amount of rewards.
DPoS is even more energy efficient than the original PoS consensus mechanism.
Generally speaking, DPoS is also able to validate transactions faster than PoS as well. However, many feel that DPoS blockchains are more centralized than other consensus mechanisms, since there are only a limited number of delegates that hold the responsibility of validating transactions.
The TRON blockchain network is a prominent example of a blockchain project that uses a DPoS consensus mechanism. The project serves as a development platform for decentralized applications (dApps). Thanks to its use of DPoS, Tron reportedly processes transactions faster and with lower fees than many other PoS based blockchains.
How are staking rewards distributed?
In return for locking up cryptocurrency that helps support the network’s operations, crypto protocols distribute cryptocurrency as a reward.
Staking rewards are distributed automatically by the blockchain protocol itself, following each new block of transactions. However, this process can vary slightly depending on the blockchain protocol.
In order to maintain the accuracy of information on the blockchain, staking reward distributions can change dynamically based on network activity, the amount of tokens being staked and other metrics.
What are slashing penalties in staking?
If a block validator acts dishonestly, their behavior may undermine the network. This could cause users to lose trust in the blockchain which may ultimately cause the native cryptocurrency of the chain to lose value.
Because of this, proof-of-stake blockchains incorporate a penalty for malicious behavior called a “slashing” penalty.
Slashing results in an amount of staked tokens being taken away from the user if the network agrees that the validator is acting dishonestly.
Double signing, or validating two blocks simultaneously during the validation process, as well as inactivity are the main causes of slashing penalties in PoS protocols. However, some protocols can partially remove a validator’s staked tokens simply for being offline for too long.
Just as honest stakers are rewarded for behaving truthfully, slashing ensures that fraudulent stakers are penalized for behaving maliciously.
Popular staking cryptocurrencies
Many of the most popular cryptocurrencies available today offer staking.
Since the annual percentage yield is set automatically by the protocol itself, rewards can change over time.
Learn more about some of the most popular crypto networks for staking:
What are the advantages of crypto staking?
The primary advantage of crypto staking is the potential it offers to earn rewards on your holdings.
Holding and staking cryptocurrency allows crypto market participants to earn rewards on the crypto they hold. This allows crypto holders to generate revenue on their crypto without needing to sell their assets.
Another benefit of staking is that you don’t need to make a large investment in expensive crypto mining equipment that PoW chains use.
PoS protocols can be run using standard computer GPUs rather than the highly specialized ASIC machines used in mining.
PoS also uses significantly less energy than PoW blockchains, which allows staking to have less of an environmental impact.
Another advantage to crypto staking is that it allows users of a blockchain network to actively support the maintenance of the protocol.
By participating in the consensus process, stakers play an important role in strengthening the networks they believe in, while simultaneously earning rewards for their efforts.
What are the disadvantages of crypto staking?
There are a few disadvantages to staking you should be aware of before committing your crypto to a protocol.
On many staking platforms, you may be required to lock up your staked coins for a specific amount of time. During this lockup period, you won’t be able to access, transfer or sell your crypto. If the market price of your staked coins drops significantly, the loss may outweigh the earnings you’ve gained by staking. However, Kraken’s staking program allows you to stake or unstake most crypto assets at any time — with no lockup periods.
Some choose not to stake their crypto holdings because of the opportunity costs associated with staking. Staking crypto means token holders cannot use their assets to participate in decentralized finance (DeFi) protocols, purchase non-fungible tokens (NFTs) or actively trade the assets in the market. Some new solutions called liquid staking protocols aim to address this tradeoff.
How to stake your crypto
There are several ways to stake your cryptocurrency. You can stake directly from some digital wallets, with decentralized finance services or directly with the protocol itself.
However, most choose to stake their tokens with trusted staking providers like Kraken.
Step 1: Buy staking assets
The first step to staking cryptocurrency is to purchase the native cryptocurrency used by the PoS protocol. Some of the most popular staking cryptocurrencies are ETH, SOL and ADA. You can buy these staking assets and more using Kraken or other crypto platforms.
Step 2: Stake directly from the exchange or transfer your crypto
Many cryptocurrency platforms like Kraken have staking programs available for you. If you purchased your staking assets from Kraken, you can get started staking immediately. You can stake your crypto with just one click on Kraken or the Kraken Pro mobile app.
If you want to use a different staking service, you will need to transfer your assets to a crypto wallet or third party service that supports staking.
Step 3: Start earning rewards
Commit your assets to a staking program to start earning rewards. Keep in mind that some assets may require a bonding period before they start earning.
Start staking crypto
Now that you have learned all about crypto staking, are you ready to take the next step in your crypto journey?
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