Crypto staking : the definitive guide

Crypto staking is an alternative to mining that enables you to earn tokens by immobilizing tokens of a PoS blockchain.

In recent years, this technique has gained popularity in the cryptocurrency world. The upcoming update of Ethereum will further strengthen its rating. The ETH 2.0 update will switch ETH from Proof-of-Work (PoW) consensus to Proof-of-Stake

What is crypto staking ?

Staking means holding crypto-currencies and locking them to ensure the proper functioning of the blockchain and secure the network. Holders of virtual currencies opt for this process, as it allows them to receive rewards in return for the immobilized tokens. In addition, it is also a way to grow your funds, rather than letting them sleep in a wallet.

However, staking is only available on blockchains that are based on PoS consensus (by proof of stake or participation). This makes staking of Bitcoins impossible. Indeed, the validation of BTC transactions depends exclusively on mining. Unfortunately, this technique is based on PoW or proof-of-work consensus.

Just like mining, staking allows you to collect tokens as a reward. But in this process, it is the holders of crypto-currencies who play a major role. They themselves participate in the operation of the blockchain. 

Staking cryptos is more accessible and economical. It does not require any investment in computer devices with huge computing power. Remember that for Bitcoin mining, expensive tools like ASICs are essential.

How does cryptocurrency staking work ?

This depends on each blockchain. Various variants of PoS have emerged, such as DPoS, LPoS and HPoS. Thus, depending on the crypto-currencies held, the staking rules can be different. However, despite their differences, these mechanisms have certain similarities :

  • be a token holder
  • lock its parts
  • become a "validator" of the network 

Note that only a few PoS candidates are granted the status of "validator" of transactions. These are the PoS network members who lock the most tokens. The selection is done randomly by an algorithm. This avoids possible centralization in a few groups of individuals. However, the network tends to give more trust to the candidates with the most at stake. Since they have a lot to lose in case of a breach, they have an interest in guaranteeing the reliability of the transactions. 

Also note that the more tokens you have locked into the network, the more rewards you will receive. The reward is usually a percentage of the cryptocurrencies injected.

The first task of the elected nodes is to validate transactions. But they also have the right to vote on decisions to be made at the blockchain level. As such, a token is generally considered as a vote. Large bets therefore have more influence on the administration of the network.

Some variants of crypto staking by Proof-of-Stake (PoS)

The main objective of the PoS mechanism is to correct some of the problems associated with proof-of-work consensus. In particular, the proof-of-stake protocol aims to improve the concept of decentralization, the speed of transaction processing and the scalability of the network. In this context, derivatives of PoS have also been developed.

Staking of cryptocurrencies in DPoS or consensus by delegated proof of stake: Bitshare, EOS, Tron, Lisk, Steem...

In a blockchain based on a DPoS protocol, the number of validators in the network is limited. Moreover, the election of these nodes is no longer carried out algorithmically, but by the owners of the tokens themselves. The latter benefit from voting rights proportional to the quantity of tokens they hold. 

Users with the most tokens have the ability to influence the election of validator nodes. These nodes will then be responsible for validating transactions and ensuring the security of the network. In addition, they are also responsible for distributing rewards proportional to the stakes of their voters.

Staking cryptos in LPoS or by proof of cash stake: Tezos

The LPoS mechanism is based on the principle that token holders can delegate their voting rights. They can choose who will be responsible for validating transactions. 

In LPoS, keeping tokens in their own wallets is not the only advantage for holders. They also have the right to vote on future changes to the network protocols.

Staking cryptos in BPoS or by proof of participation : Cosmos, IRISnet

BPoS consensus has many similarities to LPoS. Token owners can transfer their voting rights to the node of their choice, while retaining their cryptocurrencies. They also have a vote on changes to the protocols. 

Its difference with the LPoS is a security failure. Indeed, both the delegate and the token holder risk having their stakes reduced. With this measure, the network motivates token holders to be more reasonable before delegating their voting rights. It also prevents some validators from acquiring too much power.

Staking cryptos in HPoS or by hybrid proof of participation: Decred, Hcash, Eth 2.0

This mechanism is a combination of PoW and PoS. The latter aims to strengthen the security of transactions and the blockchain. To reach consensus, PoW miners create a new block of transactions. The PoS nodes, on the other hand, vote to validate it.

Advantages of cryptocurrency staking

Staking interests many crypto investors, because they do not need to invest a lot of money to start. Holding the tokens is enough to launch.

Moreover, the principle of Staking is based on the work of cryptocurrencies. It encourages the members of the network to keep and not move their assets. This leads to a decrease in the number of tokens in circulation and thus causes their scarcity. Faced with an increase in demand, the price of the token will thus be led to increase.

In addition, thanks to the ability to join staking pools, you don't need to have a lot of tokens to get started. These pools allow small coin holders to pool their holdings. In this way, they increase their chances of receiving validation rewards.