Staking

It is similar in concept to Defi yield farming, an investment strategy that involves lending or staking cryptocurrencies to liquidity providers to earn rewards in the form of transaction fees or interest. It’s similar to earning interest from a bank account, but without a middleman facilitating transactions and taking a cut.

Staking involves “locking” tokens in a digital wallet to support a blockchain network’s operations and security in exchange for rewards. Platforms that support staking typically use a proof of stake (PoS) mechanism for this purpose.

Blockchains rely on a global network of transaction validators to secure the network by authenticating transactions before the data is added to a new block on the chain. These validators (also called miners) are rewarded in the native cryptocurrency of a particular blockchain for devoting their resources to the network.

For energy-intensive blockchains that use a proof of work (PoW) mechanism, such as Bitcoin, the resource validators must devote their computing power, which requires a lot of electricity and expensive specialized hardware.

PoS improves upon the PoW model’s competitive approach by requiring significantly fewer computing resources to verify transactions and secure the network. Users who want to become validators simply have to “stake,” or pledge, the native cryptocurrency of a blockchain.

How CryptoStaking Works

If a cryptocurrency you own allows staking — current options include Ethereum, Tezos, Cosmos, Solana, and Cardano — you can “stake” some of your holdings and earn a percentage-rate reward over time.

The reason your crypto earns rewards while staked is that the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.

Staking Rewards

Many long-term crypto holders look at stake as a way of making their assets work for them by generating rewards, rather than collecting dust in their crypto wallets.

Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By taking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions.