Introduction
Staking is the process of locking up digital assets to act as collateral, helping to secure a blockchain network or smart contract protocol. This mechanism plays a vital role in maintaining network integrity and enabling participants to earn rewards.
In this article, we explore the fundamentals of staking, its purpose, different types of staking systems, operational processes, and the sources of staking income.
What Is Staking and Why Is It Necessary?
To maintain security and ensure strong Byzantine fault tolerance, a blockchain requires a sybil-resistant mechanism—a way to prevent a small number of nodes from disrupting the entire network.
A weak sybil-resistance mechanism makes a blockchain more vulnerable to 51% attacks, where a minority or colluding group could perform malicious actions such as rewriting transaction history or censoring users.
A block is essentially a batch of user transactions that are validated together during a ledger update. Each block contains not only new transaction data but also a reference to the previous block, linking all blocks chronologically through cryptographic hashes to form a "blockchain."
Validators (or miners) are responsible for producing blocks and submitting them to the network. If a majority of other validators and full nodes agree that a block is valid, it is added to the ledger.
Proof of Stake (PoS) is a sybil-resistant mechanism that requires validators to hold a economic "stake" in the network to gain the opportunity to add new blocks.
In PoS blockchains, anyone meeting the minimum native token balance requirement can join the network as a validator (staker) and participate in block production. The probability of being selected to produce a block is generally proportional to the size of the validator’s stake or the number of validator nodes they operate.
When a validator node successfully creates a valid block, it typically receives staking rewards from the protocol and a portion of user-paid fees.
To discourage malicious behavior, many PoS blockchains implement a penalty mechanism known as "slashing." Validators who break protocol rules may lose some or all of their staked tokens. Additionally, some networks impose penalties if a validator is offline and fails to produce a block when selected.
Implicit Staking in PoW vs. Explicit Staking in PoS and DPoS
Proof of Work (PoW) is another sybil-resistant mechanism used in blockchains like Bitcoin. It requires miners to compete by solving computational puzzles—generating a valid hash based on block data. The first miner to solve the puzzle and submit a block that is accepted by the network receives a reward.
The Bitcoin network automatically adjusts its difficulty every 2016 blocks (approximately every two weeks) to maintain an average block time of 10 minutes. This adjustment is typically based on the number of miners (total hash rate) participating. More miners lead to higher difficulty, which helps preserve decentralization.
In PoW, the opportunity to add a new block is proportional to the computational power expended. Although PoW blockchains do not have an explicit staking mechanism in the traditional sense, they rely on implicit staking through the purchase of expensive (often specialized) hardware and consumption of electrical power.
Miners who fail to earn block rewards may face financial loss due to hardware and electricity costs. If network security is compromised, the market value of both mining equipment and the mined assets could decline, resulting in implicit economic penalties.
Proof of Stake (PoS) replaces computational work with the requirement to stake cryptocurrency. In PoW, miners compete using computational power, while in PoS, validators compete by committing valuable tokens.
Another key difference is that in PoW blockchains, all miners compete openly in a first-to-finish race to produce blocks. In PoS systems, validators typically take turns producing blocks, often through a stake-weighted random selection process.
A variation of PoS is Delegated Proof of Stake (DPoS), which separates the roles of token holders and validators by allowing holders to delegate their tokens to existing validators. This enables token holders to participate in block production and earn rewards passively without running a validator node themselves.
This approach involves trade-offs, however. Compared to PoS networks where any user can run a node and become a validator, DPoS networks tend to have a smaller number of validators.
Participants and Processes in Staking
Token staking involves users participating either through their own validator nodes or via staking pools.
► The staking process typically involves:
⎖ Acquiring tokens: Stakers must first obtain the native token of the PoS blockchain network. For example, a user might purchase ETH on an exchange to begin staking on Ethereum.
⎖ Locking tokens: Stakers "lock" or "stake" their tokens by transferring them to a designated wallet or smart contract. These tokens are held as collateral and cannot be freely used or transferred during the staking period.
⎖ Participating in consensus: Stakers participate in the blockchain’s consensus process by running their own validator node or delegating tokens to another validator.
⎖ Earning rewards: As compensation for contributing to consensus, stakers receive rewards in the form of additional tokens or "yield."
► Validator Nodes
In PoS blockchains, validator nodes are responsible for verifying transactions and creating new blocks.
Validators are usually chosen based on the amount of tokens they have staked. This stake-based selection incentivizes compliance with consensus rules, since malicious behavior can lead to slashing. Validators with larger stakes have a higher probability of being selected to validate transactions and create blocks—but also face greater potential losses if penalized.
► Staking Pools
Some networks, like Ethereum, require a minimum stake (e.g., 32 ETH) to run an independent validator node. Many users cannot afford this, so they contribute smaller amounts to a staking pool.
Staking pools combine tokens from multiple participants and stake them collectively as collateral. This increases the chance of being chosen as a validator. Rewards are then distributed proportionally to pool contributors.
► Slashing
Validators who break network rules or engage in malicious activity—such as double-spending, transaction forgery, or coordinated attacks—face penalties. They may lose some or all of their staked tokens. The threat of slashing incentivizes validators to act honestly and contribute to blockchain stability.
Sources of Staking Rewards
In Proof of Stake blockchains, staking rewards generally come from three sources:
⎖ Block rewards: Rewards distributed to validators for participating in the consensus process. The amount is typically based on the size of the stake and the validator’s contribution to network security.
⎖ Transaction fees: Validators may also earn fees paid by users to have their transactions included in a block and processed by the network (often referred to as gas fees).
⎖ MEV rewards: Validators who engage in Maximum Extractable Value (MEV) practices can sometimes earn additional income by reordering transactions in a block to capture arbitrage or other opportunities.
Staking yield can be attractive to long-term holders looking to grow their assets while supporting network operations. Actual returns can vary based on the consensus mechanism, block reward structure, transaction fee policy, and the amount staked, among other factors.
It is important to note that yields are not fixed and may fluctuate over time due to changes in network performance and token economics. Stakers should also be aware of other risks, such as reduced liquidity during the staking period and the possibility of slashing due to rule violations.
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Frequently Asked Questions
What is the minimum amount required to start staking?
The minimum stake varies by blockchain. Some networks allow staking with very small amounts through pools, while others require a significant amount to run an independent validator node.
Can staked tokens be unstaked at any time?
Unstaking often involves a locking period during which tokens cannot be transferred or traded. The duration depends on the network’s specific rules.
How often are staking rewards distributed?
Reward distribution frequency depends on the blockchain. Some networks pay rewards per block, while others use daily or weekly distribution cycles.
Is staking considered safe?
While generally secure, staking is not risk-free. Potential risks include slashing, smart contract vulnerabilities, and market volatility affecting staked assets.
Can I stake multiple types of cryptocurrencies?
Yes, many blockchains support staking, and numerous platforms allow users to stake a variety of PoS-based tokens.
What is the difference between staking and mining?
Mining uses computational work to secure networks (Proof of Work), while staking uses locked tokens (Proof of Stake). Staking generally consumes less energy and is accessible to more participants.