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What Is Cryptocurrency Staking?

Updated: Sep 20, 2021

Staking is a key feature of blockchain technology and could earn you some passive income, too.

Every technology evolves. The first blockchain produced Bitcoin as deflationary gold, a store of value. The second type of blockchain produced smart contracts in the form of Ethereum, building the foundations of decentralized finance.

Both use a Proof-of-Work (PoW) consensus mechanism to verify transactions across network nodes. The latest third-generation blockchains are moving away from PoW to Proof-of-Stake (PoS). Instead of using mining as an energy-intensive consensus, PoS blockchains use staking.

But what is staking, and how does it work?

Consensus—Blockchain’s Backbone

To fully grasp what staking is, you must first understand why blockchains depend on consensus. As you may already know, blockchain is a distributed digital ledger across a network of computers. Each computer of that network, called a node, holds the record of the entire ledger.

Therefore, if one node goes down or is attacked, the ledger is accessed or compared against other nodes. The manner in which a ledger is verified across nodes is called consensus. As the name implies, these algorithms check all peers on the network to determine the ledger's true state—be they cryptocurrencies or smart contracts.

It then logically follows that consensus (general agreement between nodes as to the network status), that gives blockchain its reputation of an unassailable, decentralized, and trustless network. Accordingly, when a transaction is conducted, i.e., a new block added, all the users can rest assured that the new state of the blockchain is true.

How Does Staking Work?

After Elon Musk tweeted that Tesla had canceled its Bitcoin payment option, the crypto market suffered a 40% collapse. This happened not because of the cancellation itself, but because Musk framed Bitcoin as not eco-friendly enough.

RELATED:The Most Environmentally Friendly Bitcoin Alternatives

Because Bitcoin uses Proof-of-Work consensus to verify transactions and add new blocks, it is quite energy-intensive. The work needs computational power for a node to solve a math puzzle. As a result, those who verify a PoW network must invest in expensive hardware that uses quite a lot of power.

Image credit: Digiconomist

In contrast, Proof-of-Stake (PoS) blockchains such as Ethereum, Solana, Polkadot, Algorand, and Cardano use validators instead of miners. Validators become guardians of the network by staking a certain amount of the blockchain's native cryptocurrency. In other words, they lock in crypto assets which are then used to validate blockchain transactions.

Does Crypto Staking Earn a Reward?

Depending on the number of assets locked in (staked), validators receive rewards. Of course, validators are not actual people but computers that are running validator software which contains the entire copy of the blockchain.

Whenever a user submits a transaction, such as buying an NFT...

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Written by Rahul Nambiapurath.

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