What is staking and how it works?
Staking is a thing everyone hears about quite often in the world of blockchain. In general, it’s very close to a bank deposit.
Table of Contents
- What is staking?
- How does it work?
- What are the pros and cons of staking?
- Staking pools
- Does it always appear as described above?
What is staking?
Staking is a thing everyone hears about quite often in the world of blockchain. In general, it’s very close to a bank deposit. The user gives the blockchain system his crypto, and while the system uses it, the user gets passive income, just as if it was some amount of money deposited in a bank.
How does it work?
Most often staking works in blockchain systems, which have their consensus algorithm based on the Proof-of-Stake method.
The Proof-of-Stake method lets the system achieve consensus between all its nodes thankfully to some validators, which are the nodes with the biggest amount of crypto that match some particular parameters (i.e. the age of the crypto stored).
But the blockchain can’t just use random crypto from users. It needs something more stable, which can be achieved by the following algorithm:
- The user lets the system reserve some amount of crypto for the consensus system
- The system uses the reserved coins/tokens for its needs
- While using crypto the user gets paid by the system with a commission for the transactions between other users
- The user gets back the ruling over the reserved coins/tokens
As the algorithm is shown, it’s obvious that those who let the system reserve their crypto for its needs won’t be able to use that crypto unless the reservation fades.
What are the pros and cons of staking?
Staking has almost no downsides, except for the fact that in most cases it makes the crypto inaccessible for some period of time, but it has many benefits, for example:
- Users don’t need any specific technical knowledge to start staking
- It’s much cheaper since there’s no need for expensive equipment for mining
- It’s more environmentally friendly and economically profitable since no demand for specific equipment, that will drain electric power, which is bad for both Earth and the budget of a person
- The income from staking is stable and predictable, since the system rewards users with a fixed percentage from reserved coins, even though reward rates vary
When a user wants to reserve some coins for staking, he gets a chance to approve a new block and get a reward. But one person usually gets low chances of approval, which leads to cooperation between users and the creation of staking pools, which increases their chances.
When a user joins a staking pool, he unites his reserved crypto with reserved coins of other users, so the system sees a much bigger amount of suitable crypto. The algorithm of staking pool is the following:
- Users join the staking pool
- Their reserved coins get united
- The blockchain uses the crypto for its needs
- The system rewards the pool with a commission for transactions
- The reward is divided between all the users of the pool according to their contribution
Does it always appear as described above?
Definitely no. Like anything related to blockchain, staking is based on programming code. Some features can be added or removed via changing the program, letting staking be more convenient for users. Consensus algorithms get mixed with different blockchain service systems (like staking working with the Proof-of-Work consensus algorithm). These experiments with blockchain can result in the creation of something more convenient and widely used, which makes a profit for both users and creators. For example:
- Komodo’s blockchain allows users to claim coins if they have at least 10 KMD. moreover, this crypto also works on delayed Proof-of-Work protocol
- Callisto”s consensus protocol is Proof-of-Work, but one of the options of receiving new coins is staking via smart-contracts
- Tezos allows its users to use the crypto that was put into the staking algorithm. See MyTezosBaker to find out more about baking Tezos
- Cosmos ATOM is a cryptocurrency based on the PoS algorithm. You can get a reward every 24 hours.
- NEO rewards users for just owning coins.