What is Staking?
Your crypto-assets earn while you sleep!
Staking is an umbrella term used to denote the act of pledging your crypto-assets to a cryptocurrency protocol to earn rewards in exchange. Staking allows users to participate in securing the network by locking up tokens. Consequently, users are rewarded for securing the network in the form of native tokens.
The higher the amount of crypto-assets you pledge, the higher the rewards you receive. The rewards are distributed on-chain, which means the process of earning these rewards is completely automatic. All you have to do is to stake them. This means your crypto-assets earn while you sleep!
Where do these rewards come from?
Every time a block is validated new tokens of that currency are minted and distributed as staking rewards
Proof-of-stake (PoS) assets like Solana, Tezos, etc let you earn rewards on your staked assets. There are two types of rewards that get distributed
- Staking rewards/inflationary rewards
- Transaction fees
Staking rewards — You stake your crypto-assets with a PoS node (a server running the protocol stack) to validate a block of transactions. If the node you have delegated to successfully signs or attests to blocks, you receive staking rewards — thereby increasing your net crypto-assets. In case your node is unresponsive or malign (double-signing), a portion of the node’s assets, and hence your assets, can get slashed or destroyed.
The staking rewards are, thus, an incentive for these nodes to perform the process of ordering the transactions, verifying them, collecting them in a block, and subsequently validating the block. When these rewards are freshly minted they get the name inflationary rewards.
Every time a block is validated new tokens of that currency are minted and distributed as staking rewards!
Transaction Fee — In addition to the staking rewards, each transaction carries with itself a small fee making it easier for the node to prioritise the selection of transactions to be entered into the block. The accumulated fees from the underlying transactions also go to the node.
Transactions are what make up a cryptocurrency. For different protocols, these transactions could mean different things. They vary from token transfers to smart contract executions. Despite the dissimilarity in transaction types, the common thread is that these transactions always get ordered and clubbed into a new block so that all nodes in a network can agree on the state of the network.
In a centralised institution like a bank, every transaction can be verified by the central authority (bank’s central server). However, the lack of centralised authority in the crypto world requires the verification and subsequent validating of these blocks by the decentralised nodes of the network. These nodes are known by a variety of names — validators, bakers, etc. Their counterparts in the proof-of-work networks are called miners!