What Is Staking?

What Is Staking?

08:08 01/03/2021

In simple terms, Staking is the act of locking crypto tokens to receive rewards. By doing so, it also improves the security and operations of a network. It's a win-win to those who are financially aware and would like to support the open economy.

Let's understand what Staking really means in technical terms; Staking is the process of actively participating in transaction validation on a Proof-of-Stake blockchain. Anyone with a minimum required balance may participate and in return receive rewards in the form of transaction fees.

This is part 1 of our Basics of Staking series. (Part 2, Part 3, and Part 4)

In order to explain what staking is in more detail, we have to first understand how Bitcoins are mined today, and how that method is different from staking. Bitcoins are mined by miners that all implement a "Proof-of-Work" consensus algorithm. Staking is an alternative method that is rising in popularity. Let's start at the beginning.

What is Ethereum 2.0?

Ethereum 2.0 is an ambitious multi-year network upgrade of Ethereum that will achieve better scalability, security and decentralization. For more details, we recommend to read through the design goals outlined in Ethereum 2.0's official spec or Vitalik's write-up on Serenity's design rationale to learn more about the guiding principles of Ethereum 2.0's design.

What is Proof-of-Work?

Proof-of-Work is a type of algorithm that is computationally intensive for solving a mathematical challenge, with the requirement that someone who wants to answer the challenge has to prove that they've done that computation. Common applications of the Proof-of-Work are mining bitcoin and preventing denial-of-service attacks. Proof-of-Work is used for generating coins and securing the network. However, this is not the only way to secure a cryptocurrency or network. A cryptocurrency can be secured additionally by using the 'Proof-of-Stake' algorithm.

What is Proof-of-Stake?

Proof-of-Stake is a type of algorithm that is computationally lightweight for generating a new block on the blockchain. Unlike Proof-of-Work, which requires a lot of computing power to work hard to find solutions to a cryptographic problem, with Proof-of-Stake the possibilities to generate new blocks are proportional to one's shares in a cryptocurrency.

Proof-of-Stake is the process by which a blockchain network aims to achieve distributed consensus. The Proof-of-Stake algorithm rewards participants who demonstrate ownership of the network's native cryptocurrency, thereby providing an incentive to keep the network running. This is in contrast to Proof-of-Work, which rewards participants who demonstrate their "work" by using their workstation to solve a cryptographic puzzle.

A Proof-of-Stake system is an algorithm that allows a cryptocurrency network to achieve distributed consensus with greater efficiency. In this system, the creator of the next block is chosen in a deterministic manner. The creator of the next block is chosen based on their stake in the network. The more coins a participant has, the more likely they are to be the next creator of the block. This gives people with more coins an incentive to contribute, because their stake is more likely to be rewarded.

What is the difference between PoS and PoW?

Proof-of-Stake is an alternative to Proof-of-Work. Both systems share the same goal of reaching consensus but the method of doing so is vastly different. Proof-of-Work requires a great deal of computing power to solve a mathematical puzzle, whereas Proof-of-Stake rewards participants who have a high stake in the network and follow the protocol requirements (for example, uptime, internet connectivity and more).

What's Next?

Check out part 2: Why Is Proof-of-Stake better than Proof-of-Work?

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