Staking

What is staking??

Staking is an alternative to mining that requires a smaller amount of resources. It consists of keeping funds in a cryptocurrency wallet, to support the security and operations of a blockchain network. Simply put, staking is the act of locking up cryptocurrency in order to receive rewards..

If you know how Bitcoin works, you will be familiar with the Proof of Work (PoW) concept. This is the mechanism that allows transactions to be grouped into blocks. These blocks are then chained together to create the blockchain. More specifically, miners compete to solve a complex mathematical puzzle, and whoever does it first wins the right to add the next block to the blockchain..

Proof of Work has proven to be very robust as a consensus mechanism, in a decentralized way. The problem is that a lot of arbitrary computation is required. The puzzle that miners compete to solve serves no other purpose than to keep the network secure. One could argue that, for that reason alone, excessive computing would be justified. But at this point, you may be wondering: are there other ways to maintain decentralized consensus, without incurring that high computational cost??

This is where Proof of Stake comes in. The main idea is that participants can leave coins blocked in deposit (stake), and at specific intervals, the protocol will randomly assign one of them the right to validate the next block. Usually, the chance of being picked is proportional to the number of coins (the more coins you lock, the higher the chance). In this way, what determines which participants create a block is not based on their ability to solve hash challenges as it is with Proof of Work. Instead, it is determined by the amount of coins you have staking..

How does staking work??

Proof of Work blockchains rely on mining to add new blocks to the blockchain. In contrast, Proof of Stake chains produce and validate new blocks through the staking process. Staking requires validators who leave their coins locked in deposit, in order to be randomly selected by the protocol, at specific intervals, to create a block. Typically, participants who stake large amounts have a higher chance of being chosen as the validator of the next block..

This allows blocks to be produced without relying on specialized mining hardware, such as ASICs. While mining ASICs requires a significant investment in hardware, staking requires a direct investment in the crypto 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..

How are staking rewards calculated??

Each blockchain network may use a different way of calculating staking rewards. Some are adjusted block by block, taking many different factors into account. These may include::

1) How many coins the validator is staking

2) How long has the validator been active staking??

3) How many coins are staked in the network in total

4) The inflation rate

5) The inflation rate

For some other networks, staking rewards are determined as a fixed percentage. These rewards are distributed to validators as a kind of compensation for inflation. Inflation encourages users to spend their coins instead of holding them, which can increase their use as a cryptocurrency. But with this model, validators can calculate exactly what staking reward they can expect..