What is Staking in Cryptocurrency? (2024)

Staking

Published on: May 23, 2024

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In Brief

Learn about staking in cryptocurrency, a process of locking up crypto assets to support blockchain operations and earn rewards.

In the blockchain industry, staking is the practice of “locking up” crypto for a given period to support a blockchain’s operations. Stakers help validate transactions and secure a blockchain network by staking their crypto assets. For crypto holders, staking helps them put their crypto assets to work and earn rewards in exchange.

In this guide, we’ll answer the question, 'What is staking?' and dig deeper into its technical aspects, benefits, risks, and how you can stake across different blockchains.

Before we dive in, remember, with a secure crypto wallet like Trust Wallet, you can stake 20+ crypto assets such as Cardano (ADA), Ethereum (ETH), and Solana (SOL).

What Is Staking Crypto? The Basics

Staking is a process where crypto holders support the operations of a blockchain by locking up their crypto assets to help validate transactions, add new blocks, and secure the network.

Crypto staking is a key instrument in blockchain networks that use the proof-of-stake (PoS) consensus mechanism and its variations, such as delegated proof-of-stake (dPoS) and others.

By staking their crypto assets, stakers earn staking rewards. For example, at the time of writing, the annualized reward rate for ETH is around 3%, although this can change.

Staking rewards refer to the incentives that participants earn for locking up their crypto assets to support blockchain protocols. In some cases, these assets can be locked for a fixed or flexible duration, providing various rate options. Also, staking rewards vary from one blockchain network to another.

Staking is similar to Bitcoin (BTC) mining, which uses the proof-of-work (PoW) consensus mechanism, in that both stakers and miners help secure their respective blockchains, process transactions, and add new blocks. However, they differ in the technique and the rewards they give.

Let’s take a look at how the two compare:

• Accessibility: Bitcoin mining requires an investment in additional hardware, whereas, for staking, your usual smartphone or computer is sufficient. A staker just needs to hold a certain amount of crypto assets in a wallet with staking functionality, such as Trust Wallet.

• Consensus mechanism: Mining is possible in PoW networks while staking is possible in PoS networks and their variations.

Energy usage: BTC mining consumes a significant amount of energy, whereas staking consumes less energy. However, while staking is considered more environmentally friendly, mining is becoming an important factor in combating climate change and supporting renewable energy projects.

• Rewards: Miners earn rewards based on their computational power, known as hashrate, while stakers earn rewards based on the number of tokens staked. Both miners and stakers earn block rewards and fees for processing transactions. Also, they have other avenues to secure additional revenue. Miners, for example, can provide electric grid balancing services. Meanwhile, stakers, in certain instances, can leverage the so-called maximal extractable value (MEV) mechanism, which is costly for Ethereum users. In April 2024, Trust Wallet introduced MEV Protection to protect its users from such attacks.

Staking is a popular way for crypto investors to earn rewards without having to sell their crypto assets. To begin staking, investors need to have a crypto wallet and acquire a digital asset that can be staked. Trust Wallet, for instance, offers 20+ in-wallet staking options that enable users to stake various crypto assets without leaving the wallet’s interface.

It’s important to note that blockchains have a minimum staking amount, which varies from one chain to another.

Technical Aspects of Staking

Crypto staking is possible on Proof of Stake networks. Each blockchain utilizes its own specific digital currency that participants use in the staking process.

The staking currency is usually the native token of the specific blockchain network. If a blockchain is built on Ethereum or Solana blockchains, for example, the staking crypto asset would be ETH or SOL, respectively.

There are various ways that stakers can stake crypto assets. The specific method is dependent on the quantity of a crypto asset available for staking, a staker’s technical knowledge, and the wanted control level.

Self-staking

In the case of Ethereum, one option that the token holders have is to become a validator themselves. In this method, token holders need to set up a validator node on the blockchain network that they’ll also need to maintain.Although network validators have the most control over the staking process with this option, a key requirement is that they must have the technical knowledge of how to manage validator nodes, provided they have a sufficient amount of ETH to stake.

Liquid staking

The second option that potential stakers can consider is using third-party platforms. These platforms enable participants to delegate their stake to providers who operate their own validator nodes.

With this method, also known as liquid staking, stakers get to enjoy a blend of convenience and control as they can delegate the responsibility of operating a validator node to a service provider while still retaining control over their funds.

Pooled staking

The third option that stakers have is pooled staking. Pooled staking refers to a group of token holders who come together and pool their coins or tokens to boost their chances of being picked as validators. Staking pools enable users to increase their prospects of earning staking rewards, which are usually distributed proportional to each member’s contribution.

Validators and delegators have a vital role to play in the staking process. We’ll take a look at their roles in detail but for now, let’s explore how the PoS consensus mechanism used in crypto staking differs from the PoW mechanism.

Proof-of-stake (PoS) vs. Proof-of-work (PoW)

Different blockchains use different consensus mechanisms to secure and verify transactions. A consensus mechanism is a process used to validate entries into a distributed database and keep them secure. For crypto assets, this database is known as the blockchain.

There are several blockchain consensus mechanisms.

However, the PoS and PoW consensus mechanisms are the most popular. The main difference between the two is in the approach they use to process transactions and secure their blockchain.

For PoS blockchains such as Ethereum, validators have to lock up (stake) their crypto for some time in a smart contract to process and verify new blocks. Validators are chosen randomly to create the new blocks and earn rewards for adding new blocks to the blockchain.

Given that validators usually stake their own cryptoassets, the network incentivizes them against manipulating blocks. Falsifying blocks can result in validators losing a part of their staked crypto. Moreover, the more tokens a validator stakes, the more likely they are to be randomly selected to confirm and process new blocks.

The PoW consensus mechanism was the first technique used by many crypto assets such as Bitcoin. With the PoW, miners have to compete against each other to find a specific number. The first miner to find this number earns the right to add a new block to this blockchain. In return, they earn both the block reward of 3.125 BTC (this reward is valid from April 2024 until the spring of 2028) and transaction fees.

Role of Validators and Delegators

Entities or individuals who choose to take part in the staking process are mainly categorized into two categories - validators and delegators:

Validators

In staking, validators are users who own and operate their own nodes that they use to validate transactions and add new blocks. To do this, validators have to stake some of their crypto assets. The staked crypto acts as collateral and they are rewarded for truthfully completing the task.

Validators who try to manipulate the block creation process end up getting their stakes tokens slashed. This is a mechanism that’s directly coded into PoS blockchains to punish validators for malicious behavior. Each PoS blockchain has a minimum staking amount for users to become validators. On Ethereum, for instance, validators must stake a minimum of 32 ETH.

Delegators

Delegators are participants who stake their crypto by delegating validators to verify transactions and add new blocks to the blockchain. By becoming a delegator, people can take part in staking without setting up and running nodes or even staking the full amount needed to become a validator.

Both validators and delegators earn rewards for participating in the staking process.

Benefits and Risks of Staking

Just like with most innovative advancements in the crypto space, staking has its benefits and risks.

Let’s take a look at some of the benefits of staking:

• Decentralization: As staking allows multiple parties to join a network and contribute to its security, it makes the blockchain more decentralized and decreases the risks of one entity taking over the network.

• Earning Staking Rewards: Staking allows token holders to put their crypto assets to use and earn rewards. Nodes that take part in the staking process earn newly issued crypto and transaction fees. Moreover, staking allows owners to keep their assets.

• Power Consumption: Staking is considered to be more energy efficient compared to mining which uses a lot of electricity. Staking only requires participants to own/hold a specific amount of the token they want to stake in a crypto wallet, such as Trust Wallet.

• Network Security: Staking helps to keep the blockchain network secure as validators are rewarded for acting in the best interest of the network. Any validator who acts maliciously or tries to manipulate the network risks getting their staked tokens seized.

• No Additional Hardware: Staking doesn’t require any energy-intensive specialized hardware like mining does. Staking usually requires a smartphone or a computer, which makes it more accessible to people.

Below are some risks associated with staking:

• Centralization Risks: Some validators can hold a notable portion of the staked tokens in PoS blockchains, increasing centralization risks, as one or a few entities might gain significant influence and power over the network.

• Lock-up Periods: It usually takes time to unlock the staked crypto asset, meaning that stakers can’t immediately access their coins to trade them, which might result in missed opportunities, given the volatility of the crypto market.

• Slashing: PoS networks employ what is known as a slashing mechanism where validators can get penalized by having a portion of their staked tokens taken away from them for violating the network’s rule.

• Technical Risk: Technical issues, such as software bugs, might pose additional risks, as was observed in January 2024 when some Ethereum validators could not access the network due to a bug.

While staking isn’t void of risks, there are certain steps that you can take to mitigate the risks.

Many people adopt the mindset of not staking more than they can afford to lose. In addition, when staking via an intermediary, choose a validator with a good track record, for example, without repetitive slashing episodes, which might cause the validator to be removed from the network. All that said, always do your own research before interacting with any blockchain network or crypto asset.

Staking Across Different Blockchains

Staking allows investors to grow their investment portfolios while contributing to the security of the blockchain network. Major blockchains such as Cardano, Ethereum, and Solana, among others, provide staking options that offer unique opportunities and rewards.

However, staking varies across different blockchains. Different blockchains have different rules and rewards when it comes to staking. Some PoS blockchains, like Ethereum (ETH), have incorporated the slashing algorithm which punishes validators who try to falsify blocks on the network.

There are also variations of the PoS consensus mechanism. The PoS system used by blockchains, like Ethereum, is the most popular wherein validators provide the staked coins required to verify transactions and add new blocks. In addition, they receive all the block rewards.

However, there are other advancements in the PoS mechanism which include the dPoS and the nominated proof-of-stake (nPoS). Avalanche (AVAX), for instance, is an example of a blockchain that uses the dPoS consensus mechanism where delegators commit their stakes to a validator who manages a staking pool. The earned rewards are shared between the validators and delegators.

The Polkadot (DOT) blockchain is an example of a protocol that utilizes the nPoS consensus mechanism. Here, validators are nominated by nominators to add new blocks to this chain. The nominator appoints its stake to the validators, thereby electing validators and sharing the rewards.

Moreover, when it comes to calculating rewards, different blockchains consider various factors. These include the number of tokens staked by the staker, the duration the staker has been actively staking, their ability to fulfill their task, and the total number of tokens staked on the network, among others.

Staking ETH Using Trust Wallet

Let’s take a look at how you can get started staking with Trust Wallet. For this guide, we’ll take a look at how to stake ETH, although there are 20+ assets you can stake.

Key details for staking ETH using Trust Wallet

The minimum amount required for staking: 0.025 ETH.Lockup period for staking: Four days.Staking yield (APR, annual percentage rate): See rates listed in the ‘Earn’ section of the Trust Wallet app or use their earnings estimator to see what your potential earnings could be based on how much ETH you stake.

Note: Trust Wallet doesn’t control the minimum amount, lockup period, or staking rate.

How to Stake ETH

• Open the Trust Wallet app.

• Select the ‘Earn’ button at the bottom of the wallet home screen page.

• Select ‘ETH’

• Select ‘Stake’.

• Enter the amount of ETH you wish to stake and choose the validator you want to use by selecting the Validator dropdown.

• Once you select a validator, click on ‘Continue’.

• Follow the remaining prompts to confirm your stake.

Conclusion

What is staking crypto? Staking is a popular option for investors to receive rewards paid out in crypto for supporting their preferred PoS blockchain network by verifying transactions and creating new blocks.

It’s another way for investors to earn rewards by putting what would have otherwise been an idle investment into use. However, it’s important to remember that staking isn’t risk-free. There are risks such as centralization, lock-up period, and market volatility, among others.

Still, given that staking incentivizes network participants through rewards, it expands the versatility of crypto assets for crypto holders. This makes staking an important pillar of the growing crypto ecosystem.

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Note: Any cited numbers, figures, or illustrations are reported at the time of writing, and are subject to change.