What is Crypto Staking?

Crypto staking is the act of digitally locking up your assets onto their native blockchain to allow transactions to be verified on the network. In traditional finance a middleman is needed to verify transactions and general activity between users. Thanks to the decentralized, open source nature of the blockchain staking crypto allows YOU to become the intermediary. 

Staking puts your crypto to work and in return you can earn a predetermined APR staking reward in the form of the native token. It’s become a really popular way to earn passive income in the crypto investing world. When you are staking crypto there is a concept known as a node.

Imagine these as equipment that allows you to stake through providing computing power and infrastructure for staking to occur. In addition to this there are a group of people or bodies in staking known as node validators. Being given this title means you are on high alert as you’re the individual who is processing transactions on the network generating the rewards and throughput.

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Different Options For Staking

Over time there have been a number of platforms, or staking protocols, that have the infrastructure for you to lock your assets up. These can either be found on a centralized exchange such as Cryptology, or alternatively on a decentralized exchange such as SushiSwap.

Different staking protocols have different options in terms of lockup periods, APR reward percentages and token options.

Of course there are levels of knowledge needed for staking. That’s why there are different types of staking you can get involved with. They include:

• Custodial staking
• Non-custodial staking

Custodial staking is more suited for a beginner, or someone who wants a more streamlined experience when staking. A centralized exchange will take control of your private keys and take a lot of the leg work off of you. 

Non-custodial refers to you taking ownership of your private keys, on a decentralized exchange. This means you have full control over your assets, but it’s on you to ensure you know what you’re doing. Rather than staking on a platform you can do so directly from your wallet, retaining complete control over your crypto and reducing counterparty risks.

This does spark the debate on whether or not you truly have control of your crypto if private keys are left with someone else. 

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What is Proof of Stake

In crypto there is a piece of technology known as a consensus mechanism. Imagine this as a peace keeper of sorts for a network on the blockchain. It allows active nodes to come to an agreement to execute actions such as transactions.

This idea is vital for crypto to operate. The first consensus mechanism was Proof of Work (PoW) and helped to operate the Bitcoin network when first created. However due to scaling issues for the blockchain a new consensus was proposed which we will get into next!

Proof of Stake (PoS) is the next consensus inline after PoW. Proof of Stake (PoS) is used in blockchain networks to validate and authenticate transactions, just like a referee ensures fair play in a game. It's an alternative to the more traditional PoW system used by cryptocurrencies like Bitcoin that was mentioned above.

PoS relies on validators, or "stakers," who have a stake in the network to create new blocks and secure the blockchain.

Imagine you and your friends want to play a game of soccer, but instead of using a referee to keep the game fair, you decide to use a Proof of Stake system. 

Here's how PoS works:

Staking

In PoS, players (validators) stake a certain amount of cryptocurrency, like putting money into a pot before playing a game. This stake acts as collateral and gives them the right to validate transactions and create new blocks. The more cryptocurrency they stake, the higher the chance they have of being chosen to create the next block.

Block Creation

Just like in soccer, where players take turns to be the goalkeeper, in PoS, validators take turns to create new blocks. The probability of being chosen to create a block is proportional to the amount of cryptocurrency they have staked. So, someone who has staked more cryptocurrency has a greater chance of being selected.

Verification and Reward

When a validator creates a block, they propose it to the network. Other validators then verify the block to ensure it follows the rules of the game (consensus rules). If the block is valid, it gets added to the blockchain, and the creator receives a reward, just like scoring a goal in soccer.

Security and Incentives

Validators have an incentive to play by the rules because if they try to cheat or act maliciously (e.g., by creating invalid blocks), they risk losing their staked tokens. This is similar to how soccer players follow the rules to avoid penalties or being sent off the field.

An Analogy of PoS

To understand PoS is a voting system in a club. Imagine you and your friends want to decide where to go for a club outing. 

Instead of each person having one vote (like in a democracy), the voting power is based on how much money each person has contributed to the club. Those who have contributed more money have more influence on the decision. 

This encourages members to make decisions that benefit the club because they have a financial stake in its success.

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The History of Crypto Staking

Crypto staking can first be dated back to 2012, 4 years after Bitcoin’s emergence onto the blockchain. 

The brains behind Proof of Stake was Sunny King and Scott Nada who proposed the idea in their own research paper. They highlighted the high energy consumption that Bitcoin mining was using on the Proof of Work consensus. 

$150,000 a day was the cost to maintain Bitcoin’s network. Sunny and Scott came up with staking as a way to algorithmically overcome this issue with nodes that were chosen based on the amount of tokens a user held.

The first token that could be staked was called Peercoin in 2013 and was created by Sunny themselves. 

Interestingly it was the first PoS token and still utilized the PoW consensus mechanism.

After Peercoin many more staking tokens followed including Blackcoin in 2014 and then the most notable being Ethereum in 2013. 

Ethereum made the switch from Proof of Work in its Ethereum 2.0 update that took the blockchain by storm. An important benchmark in the network’s timeline as users could now stake and scale the network for their dApps. 

There are many different tokens now that have implemented PoS into their infrastructure including: 

• Polygon (MATIC)
• Avalanche (AVAX)
• Arbitrum (ARB)
• Immutable X (IMX)
• Cardano (ADA)

More and more tokens are being released with staking features attached to them offering investors an alternative method to earning on the blockchain past trading.

It must also be noted that if you opt for a non-custodial option when staking ETH you will have to set up your own nodes. This comes at a fairly hefty cost depending on the price of ETH at the time but the flat rate gets started at 32 ETH. 

As crypto staking became more popular and users began seeing the benefits it was bringing not only to them but the blockchain, new passive income methods started to pop up.

We won’t go into too much detail here, but an example we can give is liquidity mining that is available across many different blockchains and decentralized finance platforms. 

Investors give up some of their funds to DEXs (decentralized exchanges) as liquidity and then from that they’re able to gain rewards from fees. 

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Pros and Cons of Staking

Of course with anything related to crypto it’s important to understand the positives and drawbacks associated. 

Staking is no stranger to this. While somewhat a fundamental aspect of the crypto experience, different traders must consider whether staking is right or not for them based on these truths. 

Here they are in a bit more detail:

Pros:

Energy efficiency

Unlike Proof of Work (PoW), which requires miners to solve complex mathematical puzzles that consume a lot of computational power and electricity, staking is much more energy-efficient. It reduces the environmental impact associated with cryptocurrency mining.

Scalability

Validators of PoS networks do so based on the amount of crypto they hold unlike PoW. This in turn creates faster transaction speeds and a more scalable network for dApp developers.

Security

Staking incentivizes validators to act honestly and follow the rules of the network. Validators have a financial stake in the system, so they're less likely to engage in malicious activities that could harm the network. This contributes to the overall security and integrity of the blockchain.

Passive income

Those who stake their tokens do so to validate transactions and network activity. This in return earns them a passive income as they leave their tokens to do the work for them. 

Decentralization

Staking promotes decentralization by distributing power among a larger number of participants. Unlike PoW, where mining power tends to be centralized, staking allows more individuals to participate in the validation process, leading to a more decentralized network.

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Cons:

Risk of slashing

Validators in PoS systems risk losing a portion of their staked cryptocurrency if they act maliciously or fail to follow the rules of the network. This penalty, known as slashing, is designed to discourage dishonest behavior, but it also presents a risk for validators.

Capital requirement

Participating in staking typically requires a minimum amount of cryptocurrency to be staked. For example, Ethereum requires validators to stake at least 32 ETH. This can be a barrier to entry for smaller investors who may not have enough capital to meet the staking requirements, but there are alternatives such as custodial staking. 

Centralization Risk

There's a risk of centralization, especially if a small number of large validators control a significant portion of staked assets. A concentration of power undermines the security and decentralization of the network.

Market Volatility

The value of staked cryptocurrency can fluctuate with market conditions. Validators are exposed to price volatility risk, meaning the value of their assets could decrease affecting the overall profitability of staking.

Lock-up Period

Validators are required to lock up their cryptocurrency for a certain period of time. During this lock-up period, the staked assets cannot be freely traded or accessed. Therefore only stake assets you don’t necessarily need!

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How To Get Started with Staking

Getting started with staking is quite straightforward. If you are new to this then be sure to follow the steps to join Cryptology staking as it’s a very user friendly option with some of the best APR rewards on the blockchain.

1. Sign up to Cryptology exchange and follow the necessary steps to get set up.
2. Once signed up, deposit the necessary crypto into your account. 
3. Choose which coin you want to stake. On Cryptology you can stake Ethereum, Solana, Polkadot, Kusama and The Graph.
4. It’s now time to sit back and collect your crypto rewards.
5. Once you are happy with your earnings or you just want to remove your initial stake you can withdraw your assets any time after the unbonding period for your convenience.

It’s really that simple at Cryptology to get started staking and can also be accessed via the Cryptology App.

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A Roundup of Crypto Staking

If you have gotten this far into our article, what’s your overall thoughts on staking in crypto?

It’s a very revolutionary concept that has been able to give crypto investors a glimpse into what is possible within DeFi. Unlike traditional finance you reap the rewards more for being a contributor to a monetary system.

There are now many options for staking along with different staking platforms to get started with. 

But of course be aware of the drawbacks associated with staking such as market volatility and security. With the correct due diligence though you will be able to navigate staking with ease!

If you enjoyed this course be sure to check back for the next part, and hopefully soon you will be a staking master! Follow us over on Twitter/X to be kept updated on all things Cryptology.

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