Staking is a process where network participants can earn rewards by locking their coins in crypto wallets and making them available for validating network transactions or providing liquidity.
- Consensus in a PoS network is achieved through validators who stake their coins. Validators are randomly selected participants who verify whether transactions are valid and correct;
- To become a validator, participants must deposit a predetermined minimum amount of the network's native token into a blockchain-linked wallet;
- The original concept of staking, common in Proof-of-Stake networks, is increasingly being adopted by DeFi apps, allowing users to stake coins and generate additional yields.
This guide covers everything you need to know about staking—from foundational mechanisms like Proof of Stake (PoS) and Delegated Proof of Stake (DPoS) to the risks and future prospects of this exciting aspect of the crypto world. Whether you're new to cryptocurrencies or an experienced investor, this article provides valuable insights into what staking is, how it works, and its significance for the crypto ecosystem.
What is Staking?
Crypto staking involves depositing cryptocurrencies into a network to confirm transactions. Users secure the network and receive new coins as rewards—similar to earning interest on savings.
By definition, staking is a crypto process that allows network participants to earn rewards by locking their coins in wallets. These coins are then used to validate transactions or provide liquidity. Staking is used in networks based on the Proof of Stake (PoS) consensus algorithm, where consensus is achieved through validators (participants who stake their coins and participate in verifying transactions).
Participants become validators by depositing a predetermined minimum amount of the network's cryptocurrency into their wallet. This qualifies them to earn rewards for their staked assets.
When Does Staking Begin?
Simply put, the staking process begins once validators set up their clients and ensure their setup is secure and up-to-date. They are then randomly selected by an algorithm to validate transaction blocks.
Since these validators have a direct interest in the network's success, staking promotes responsible and secure network behavior, contributing to blockchain stability. Additionally, staked capital serves as collateral, which can be forfeited if validators act dishonestly. This mechanism reinforces their commitment to acting in the network's best interest.
Proof of Stake (PoS)
A Proof of Stake (PoS) network is considered a more environmentally friendly alternative to Proof of Work due to its significantly reduced energy consumption. In PoS, rewards go to validators who stake tokens and are randomly selected, rather than miners solving computational puzzles. This method requires far less computing power and maximizes energy efficiency.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake (DPoS) networks democratize PoS by introducing additional rules for validator selection. Participants vote for representatives—called witnesses or delegates—based on their staked coins. Witnesses validate blocks, while delegates oversee network governance and security.
How Does Staking Work?
Staking allows crypto holders to earn returns by locking their coins in a staking wallet—similar to a savings account generating interest. Earnings depend on the amount staked and the duration of the lock-up.
To start staking, set up a compatible staking wallet. Coins are "delegated" (remain in your wallet) rather than transferred. Delegation maintains control over assets while contributing to network security. This can be done by running a validator node or using a provider wallet like OKX.
Warning: Never transfer coins to a wallet you don’t own. Scammers may request transfers to unknown addresses—this is fraudulent and irreversible. However, transferring assets to trusted platforms like OKX is safe.
Why Does Staking Exist?
Validators stake crypto to earn income, aligning their interests with network success. Staking is increasingly vital in decentralized finance (DeFi), where users deposit assets into liquidity pools to generate earnings—similar to traditional bank interest.
Can All Cryptocurrencies Be Staked?
Not all cryptocurrencies support staking. It’s typically limited to those using PoS or similar mechanisms. Proof of Work (PoW) coins like Bitcoin cannot be staked (they rely on mining).
Examples of stakable cryptocurrencies:
- Ethereum 2.0
- Cardano (ADA)
- Tezos (XTZ)
- Polkadot (DOT)
- Algorand (ALGO)
👉 Explore staking opportunities
Are There Risks to Staking?
Staking carries risks:
- Lock-in risk: Staked coins can’t be traded during the lock-up period.
- Platform security: Choose reputable providers to avoid hacks.
- Slashing: Penalties for validator misconduct.
- Tax implications: Rewards may be taxable.
The Future of Staking in Crypto
Staking is poised for growth as an eco-friendly alternative to mining. Innovations like cross-chain staking could enhance flexibility, while regulation may attract institutional investors.
FAQs About Staking
How Secure is Staking?
Security depends on the platform and network stability. Use trusted providers like OKX and hardware wallets to mitigate risks.
How is Staking Yield Calculated?
Yield is based on staked amount, duration, and reward rates. Some platforms use Annual Percentage Yield (APY) to estimate earnings.
What Are Staking Pools?
Pools combine resources to improve reward chances. Rewards are distributed proportionally among participants.
What Does APY Mean in Staking?
APY (Annual Percentage Yield) reflects compounded earnings over a year, including reinvested rewards.
What is a Lock-in Period?
A timeframe where staked coins cannot be moved or sold, ensuring network security.