What Is Cryptocurrency Staking? How Does Proof of Stake (PoS) Work in Blockchain?

What Is Cryptocurrency Staking? How Does Proof of Stake (PoS) Work in Blockchain?

Bitcoin, the most expensive cryptocurrency, uses a proof-of-work protocol which has already shown itself as not the most efficient. The most advanced cryptocurrencies run on a different protocol called proof-of-stake. The interest of investors and users in cryptos running on a proof-of-stake protocol is growing exponentially, and it happens for a reason.

Do you want to learn more about crypto staking and its benefits? Read on.

What Is Staking Crypto?

When we speak about staking, we mean participating in the transaction validations on the blockchain. In the case of cryptocurrencies that run based on a proof-of-work protocol, miners validate transactions. Whoever solves a cryptographic puzzle first, validates the transaction and gets a reward.

In the case of staking, there are no miners even though we might speak about PoS mining. Users can lock their coins (stake them) to be able to validate transactions in the network. Users who staked their coins are called forgers. The protocol randomly assigns forgers the right to validate a specific transaction. The more coins are locked by you, the higher chances you have.

The chance to solve a block doesn`t depend on the computational power you have but on the number of coins you lock.

What is Proof of Stake (PoS)?

While the process of crypto staking is clear now, you might be wondering what the proof-of-stake is. It is an algorithm. It was launched with the aim to solve the issues that one of the most popular protocols used for crypto – proof-of-work – started facing.

This algorithm assigns a right to validate transactions to a specific node – a computer that has staked a minimum required number of coins. The decision of what node to choose frequently depends on the node wealth, staking age, and randomization plays a significant role.

Who Created Proof of Stake?

Now, when you know how proof of stake works, you might be wondering who has created this mechanism to confirm transactions.

It is commonly believed that PoS was mentioned for the first time in the paper written by Sunny King and Scott Nadal in 2012. The paper was about the Peercoin project, and the coin had to run on a hybrid PoW/PoS protocol.

How Does Cryptocurrency Staking Work?

Now, it is time to check in detail how proof of stake cryptocurrency works and what you can do to start validating transactions. What about a short example? It will make you understand perfectly what staking a coin means, how staking works, what reward amount you can expect for a validated transaction, and many more details.

If you want to participate in staking, you need to deposit a required number of coins in a special wallet. While you are staking coins, you cannot use them, they are locked. Say, if a network requires you to stake 200 coins, you cannot use them in any other transactions. Moreover, if you want to get the coins back, they might not be available for some time.

While you are staking coins, you can be elected by the cryptocurrency PoS protocol to validate a transaction and get a reward.

How Are Staking Rewards Calculated?

Rewards are calculated differently by different networks.

Sometimes, a reward is given on a block-per-block basis. Here, the following factors matter:

  • The number of staked coins
  • The age of staked funds
  • The inflation rate, and many other factors.

In some networks, validators are awarded a specific percent from a transaction. In any case, the reward is predictable which makes more users interested in staking. To increase the chances of being elected for transaction validation, some users create staking pools.

What Is a Staking Pool?

A staking pool is formed when some users combine their resources to get more chances to earn. Usually, rewards earned by a pool are shared among its participants proportionally to their contribution.

Setting up a staking pool is not an easy task from a technical point of view, and it requires a lot of time and effort to maintain it. Also, a pool charges a fee from each participant. Usually, it is a percentage of every received award. Setting such a pool is efficient when the entry barrier is high.

What Is Cold Staking Cryptocurrency?

Security is one of the main concerns when it comes to funds. To keep the coins as safe as possible, cold wallets are used. Those are the wallets that aren’t connected to the internet. Cold wallets are also used by some networks to store staked coins. It provides additional security to the coins and is especially useful for large stakeholders who want to get the maximum awards and keep their coins as safe as possible.

What Are the Advantages of Staking?

Since proof of stake blockchain is growing in popularity, it has to offer some benefits. And indeed, there are many advantages, and they aren’t limited to the coin network only. Among the most significant advantages we can distinguish the following:

  • PoS doesn`t require huge computational power as it happens in the case with PoW. For the environment, it means a lot. Significantly less energy is spent, less heat is released, and similar. The benefits to the environment are unbeatable.
  • PoS guarantees a higher security level to the network than PoW. Fraudulent transactions lose sense if the network runs on the PoS because if a forger is caught by trying to validate a fraudulent transaction, he loses a part of the staked coins and the right to forge blocks. The losses are higher than the benefits. Also, the danger of a 51% attack is absent in the networks that run on PoS.
  • Staking coins is relatively safe. You aren’t trading them but just keeping them in a special wallet and earning rewards.

What Cryptocurrencies Can Be Staked?

Now, when proof of stake is explained and you know how proof of stake works, you might want to know what crypto can be staked profitably. Here is the list of the most popular coins that run on the PoS protocol and offer attractive staking opportunities.

  1. Ethereum 2.0 is one of the top staking opportunities. Ethereum is one of the fastest-growing networks, and the forecasts are positive. To validate transactions, you need to stake at least 32 Ethers.
  2. BNB, the Binance Coin, is growing in popularity. Staking in it alone can bring you up to 30% returns.
  3. Tezos was launched in 2018 and caused a huge storm in the market with its ICO by collecting over $230 million in investment. Tezos allows validating with 8,000 coins staked.
  4. Algorand or ALGO is aimed at the provision of cheap cross-border payment opportunities. That’s why the interest in the project is growing, and with it, the coin value is increasing. The rewards for stakeholders can vary from 8 to 10% depending on the platform they use.
  5. Icon, or ICX, is another popular network running on the PoS protocol. Yet, it differs from the previous coins through the usage of a specific proof-of-stake protocol called the delegated proof-of-stake consensus algorithm. Icon stakeholders can get from 6 to 36% of benefits per year depending on the platform they use.
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What Is Cryptocurrency Staking? How Does Proof of Stake (PoS) Work in Blockchain?

Posted by staff on June 14, 2021

Blockchain cryptocurrency Insights & Tutorials


What Is Cryptocurrency Staking? How Does Proof of Stake (PoS) Work in Blockchain?

What Is Cryptocurrency Staking? How Does Proof of Stake (PoS) Work in Blockchain?

Bitcoin, the most expensive cryptocurrency, uses a proof-of-work protocol which has already shown itself as not the most efficient. The most advanced cryptocurrencies run on a different protocol called proof-of-stake. The interest of investors and users in cryptos running on a proof-of-stake protocol is growing exponentially, and it happens for a reason.

Do you want to learn more about crypto staking and its benefits? Read on.

What Is Staking Crypto?

When we speak about staking, we mean participating in the transaction validations on the blockchain. In the case of cryptocurrencies that run based on a proof-of-work protocol, miners validate transactions. Whoever solves a cryptographic puzzle first, validates the transaction and gets a reward.

In the case of staking, there are no miners even though we might speak about PoS mining. Users can lock their coins (stake them) to be able to validate transactions in the network. Users who staked their coins are called forgers. The protocol randomly assigns forgers the right to validate a specific transaction. The more coins are locked by you, the higher chances you have.

The chance to solve a block doesn`t depend on the computational power you have but on the number of coins you lock.

What is Proof of Stake (PoS)?

While the process of crypto staking is clear now, you might be wondering what the proof-of-stake is. It is an algorithm. It was launched with the aim to solve the issues that one of the most popular protocols used for crypto – proof-of-work – started facing.

This algorithm assigns a right to validate transactions to a specific node – a computer that has staked a minimum required number of coins. The decision of what node to choose frequently depends on the node wealth, staking age, and randomization plays a significant role.

Who Created Proof of Stake?

Now, when you know how proof of stake works, you might be wondering who has created this mechanism to confirm transactions.

It is commonly believed that PoS was mentioned for the first time in the paper written by Sunny King and Scott Nadal in 2012. The paper was about the Peercoin project, and the coin had to run on a hybrid PoW/PoS protocol.

How Does Cryptocurrency Staking Work?

Now, it is time to check in detail how proof of stake cryptocurrency works and what you can do to start validating transactions. What about a short example? It will make you understand perfectly what staking a coin means, how staking works, what reward amount you can expect for a validated transaction, and many more details.

If you want to participate in staking, you need to deposit a required number of coins in a special wallet. While you are staking coins, you cannot use them, they are locked. Say, if a network requires you to stake 200 coins, you cannot use them in any other transactions. Moreover, if you want to get the coins back, they might not be available for some time.

While you are staking coins, you can be elected by the cryptocurrency PoS protocol to validate a transaction and get a reward.

How Are Staking Rewards Calculated?

Rewards are calculated differently by different networks.

Sometimes, a reward is given on a block-per-block basis. Here, the following factors matter:

  • The number of staked coins
  • The age of staked funds
  • The inflation rate, and many other factors.

In some networks, validators are awarded a specific percent from a transaction. In any case, the reward is predictable which makes more users interested in staking. To increase the chances of being elected for transaction validation, some users create staking pools.

What Is a Staking Pool?

A staking pool is formed when some users combine their resources to get more chances to earn. Usually, rewards earned by a pool are shared among its participants proportionally to their contribution.

Setting up a staking pool is not an easy task from a technical point of view, and it requires a lot of time and effort to maintain it. Also, a pool charges a fee from each participant. Usually, it is a percentage of every received award. Setting such a pool is efficient when the entry barrier is high.

What Is Cold Staking Cryptocurrency?

Security is one of the main concerns when it comes to funds. To keep the coins as safe as possible, cold wallets are used. Those are the wallets that aren’t connected to the internet. Cold wallets are also used by some networks to store staked coins. It provides additional security to the coins and is especially useful for large stakeholders who want to get the maximum awards and keep their coins as safe as possible.

What Are the Advantages of Staking?

Since proof of stake blockchain is growing in popularity, it has to offer some benefits. And indeed, there are many advantages, and they aren’t limited to the coin network only. Among the most significant advantages we can distinguish the following:

  • PoS doesn`t require huge computational power as it happens in the case with PoW. For the environment, it means a lot. Significantly less energy is spent, less heat is released, and similar. The benefits to the environment are unbeatable.
  • PoS guarantees a higher security level to the network than PoW. Fraudulent transactions lose sense if the network runs on the PoS because if a forger is caught by trying to validate a fraudulent transaction, he loses a part of the staked coins and the right to forge blocks. The losses are higher than the benefits. Also, the danger of a 51% attack is absent in the networks that run on PoS.
  • Staking coins is relatively safe. You aren’t trading them but just keeping them in a special wallet and earning rewards.

What Cryptocurrencies Can Be Staked?

Now, when proof of stake is explained and you know how proof of stake works, you might want to know what crypto can be staked profitably. Here is the list of the most popular coins that run on the PoS protocol and offer attractive staking opportunities.

  1. Ethereum 2.0 is one of the top staking opportunities. Ethereum is one of the fastest-growing networks, and the forecasts are positive. To validate transactions, you need to stake at least 32 Ethers.
  2. BNB, the Binance Coin, is growing in popularity. Staking in it alone can bring you up to 30% returns.
  3. Tezos was launched in 2018 and caused a huge storm in the market with its ICO by collecting over $230 million in investment. Tezos allows validating with 8,000 coins staked.
  4. Algorand or ALGO is aimed at the provision of cheap cross-border payment opportunities. That’s why the interest in the project is growing, and with it, the coin value is increasing. The rewards for stakeholders can vary from 8 to 10% depending on the platform they use.
  5. Icon, or ICX, is another popular network running on the PoS protocol. Yet, it differs from the previous coins through the usage of a specific proof-of-stake protocol called the delegated proof-of-stake consensus algorithm. Icon stakeholders can get from 6 to 36% of benefits per year depending on the platform they use.
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