Beginner's Guide to Staking
Learn how staking lets you earn passive income while securing the network.
What is staking?
Staking is a process that allows users to earn crypto rewards by holding and validating transactions on a Proof-of-Stake (PoS) blockchain network.
Unlike Bitcoin's traditional Proof-of-Work (PoW) consensus algorithm that requires miners to solve complex mathematical problems, PoS relies on validators or stakers to secure the network and validate transactions - it's like a club where you need to prove that you're invested in its success to gain a seat at the decision-making table.
In a PoS network, validators are required to stake a certain amount of cryptocurrency to participate in the network's decision-making process. This is done to ensure that validators have a stake in the network's security and stability, and will act in the best interests of the network.
To stake, users need to hold a certain amount of cryptocurrency and lock it up in a wallet or a smart contract for a certain period of time.
This locked-up cryptocurrency is known as a stake and the longer the user stakes, the more rewards they can earn.
Staking has become increasingly popular as it offers a way to earn passive income without the need for expensive mining equipment or technical knowledge.
What is the difference between staking and mining?
Crypto rewards can be earned through staking or mining, but the main process of validating transactions differ.
Mining validates transactions on a PoW blockchain network like Bitcoin. Miners use specialized computer equipment to solve complex mathematical problems and validate transactions which requires a significant investment in hardware and high electricity costs.
Staking, on the other hand, validates transactions on a PoS blockchain network like Ethereum or Polkadot. Validators are required to stake a certain amount of cryptocurrency to participate in the network's decision-making process, which requires less technical knowledge and hardware equipment.
Staking rewards and mining rewards are both distributed in the form of newly minted tokens and transaction fees.
Staking validators explained
Validators are the unsung heroes of the crypto world - these are the individuals who help secure the network and validate transactions on a PoS blockchain - think of them as the guardians of the network, ensuring that all transactions are legitimate and the network remains secure.
Validators stake a certain amount of cryptocurrency to participate in the network's decision-making process, where they are responsible for validating transactions and ensuring that they are added to the blockchain in a secure and trustworthy manner.
To prevent malicious attacks on the network, validators have a financial stake in the network's security and stability; if a validator acts maliciously, it can lose its entire stake in an event known as slashing.
For example, in the following events, a validator on Ethereum may be slashed:
Double Signing: If a validator signs two different blocks at the same height, they will be penalized for double signing. The penalty for double signing is a percentage of the validator's stake, depending on the severity of the offense.
Downtime: If a validator goes offline for an extended period of time, they will be penalized for downtime. The penalty for downtime is also a percentage of the validator's stake, depending on the length of time they were offline.
Invalid Blocks: If a validator creates an invalid block, they will be penalized for creating an invalid block. The penalty for creating an invalid block is also a percentage of the validator's stake.
In summary, validators stake cryptocurrency in order to participate in a PoS blockchain network, help maintain its security and stability, increase network participation and decentralization, and earn rewards for their participation.
These rewards can vary depending on the cryptocurrency being staked and the length of time the cryptocurrency is held, but they can be a great way to earn income in crypto while contributing to the network security.
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