Staking basics

What is Staking?

Zainab Saberi

Jul 28, 2023 • 7 min read

Staking enables crypto enthusiasts to employ their digital assets, securing rewards without relinquishing ownership.

Imagine staking as the crypto-world's answer to parking digital assets in a high-gain account. Typically, when digital assets are placed in such an account, the intermediary uses these assets and offers them to others. By committing your digital assets in this manner, you get a share of the benefits acquired, although it's relatively minimal.

In a similar vein, staking your digital assets means you secure the coins to play a role in operating the blockchain and safeguarding its integrity. As a token of gratitude, you gain returns determined by specific percentages, which generally surpass any returns provided by traditional methods.

Also Read: Defi Staking

How does staking work?

The process of staking is functional solely through the proof-of-stake consensus protocol. This unique approach is employed by select blockchains to pick genuine contributors and authenticate fresh data blocks for the network.

By obligating these network members, often referred to as validators or "stakers", to acquire and secure a definite quantity of tokens, it deters any fraudulent actions. Any harm to the blockchain via unscrupulous activities would likely result in a decrease in the value of its native token, causing potential loss for the wrongdoer.

The stake acts as the validator's commitment to operate sincerely for the welfare of the network. Based on their dedication, validators attain rewards in the form of native cryptocurrency. A substantial stake amplifies their odds of suggesting a new block and garnering the rewards.

Generally, validators initiate a staking pool and accumulate digital assets from a collective of token owners via delegation. Thus, any owner can engage in the staking mechanism by entrusting their coins to these pool operators, who tackle the intricate task of verifying transactions on the blockchain.

Also Read: Type Of Blockchain

Why do only some cryptocurrencies have staking?

The technicalities here are profound. For example, Bitcoin doesn’t offer staking. Decentralization is a hallmark of cryptocurrencies, negating a central governing entity. So, how do these decentralized systems come to an accurate conclusion? They utilize a "consensus mechanism."

Several cryptocurrencies, Bitcoin and Ethereum 1.0 [that is Ethereum pre-merge] included, employ the Proof of Work consensus mechanism. However, for more multifaceted systems like Ethereum, Proof of Work can result in congestion, escalating transaction durations and fees.

What is Proof of Stake?

Emerging as an alternative is the Proof of Stake mechanism, which aims to amplify speed, efficiency, and affordability. Unlike Proof of Work, Proof of Stake doesn't mandate exhaustive computational challenges, making it energy-efficient. Here, transactions are authenticated by individuals who stake their tokens, ensuring blockchain security. The intricacies might differ across projects, but fundamentally, users pledge their tokens to uphold the safety of the blockchain.

Also Read: Layer-2 Blockchain

What is Liquid Staking?

In essence, liquid staking mirrors native staking where users commit their tokens to the blockchain, supplying liquidity to the reserve. However, a notable distinction follows. Liquid staking platforms offer the staker receipt tokens, akin to an acknowledgment of their stake. Termed as Liquid Staking Tokens (LSTs) or Liquid Staking Derivatives (LSDs), these assets are anchored to the initial asset's value. Intriguingly, these tokens operate like any other blockchain token, usable in various DeFi protocols and blockchain apps. Let’s delve deeper into its functioning.

Also Read: What Is Cryptocurrency

How can I get started with liquid staking with Stader? What are the steps involved?

- Step 1: Shift your crypto tokens to a favored wallet like Metamask, Ledger, Coinbase Wallet, etc.

- Step 2: Choose a suitable liquid staking platform like Stader Labs and the desired network/blockchain's native asset for staking, such as Ethereum, Polygon, Binance, etc.

- Step 3: Connect your wallet to the platform and input the number of tokens you wish to stake. You can see the projected liquid tokens equivalent to your stake and the pertinent transaction fee.

- Step 4: Post transaction approval, the liquid staking provider’s smart contract will secure your assets, furnishing their liquid tokens in return.

- Step 5: Now, you're entitled to gain staking rewards and can utilize the provided liquid tokens for trading, lending, borrowing, liquidity mining, and engaging in other DeFi activities for added benefits.

Also Read: What Is Defi

What are the advantages of Staking?

For many dedicated crypto enthusiasts, staking is a strategy to make their assets fruitful, obtaining rewards rather than letting them remain stagnant. Furthermore, staking augments the blockchain projects they vouch for by enhancing their security and transaction processing prowess.

Also Read: What Is MEV

What Are the Disadvantages of Staking?

Like all ventures, especially in the crypto realm, staking presents certain challenges. The erratic nature of cryptocurrencies means that a drop in value might negate any potential rewards. It's optimal for those who envision a long-term commitment, unfazed by market fluctuations. Some tokens might have a stipulated lock-in duration or a waiting period post-withdrawal. Additionally, potential risks involve staking pool operators not adhering to their responsibilities, or even worst-case scenarios like staking pools being compromised.

Is it good to stake crypto?

Staking can be a lucrative choice for individuals keen on reaping benefits on their prolonged ventures, undeterred by short-lived market volatility.

Which is the best platform for staking crypto?

Stader stands out as a secure liquid staking platform, offering rewarding returns in line with market norms. Our platform is rooted in non-custodial smart contracts, simplifying your access to staking solutions. We're crafting pivotal staking infrastructure for multiple PoS networks catering to individual crypto users, exchanges, and custodians.

What cryptocurrencies can be staked at Stader?

Stader supports Liquid Staking for native tokens of Proof-of-Stake blockchains, including popular choices like Ethereum, Polygon, Hedera, BNB, Fantom, Near, and Terra 2.0.

How secure is staking with Stader?

Stader emphasizes on the utmost protection of your liquid staking tokens, ensuring they are safeguarded by adopting stringent security protocols and multisignature (multisigs) mechanisms. We've been thoroughly audited by top-tier security companies like Sigma Prime, Halborn, Peckshield, and Code4rena. We've also collaborated with Forta for on-chain surveillance and initiated a bug-bounty Program with Immunefi. Our track record of successfully safeguarding numerous liquid tokens for over a year and a half underscores our dedication to strong defense.

What does Stader Labs bring to the table for stakers?

Stader Labs, a pioneer in the realm of liquid staking, permits users to stake their digital assets without binding them for a fixed duration. This means users can capitalize on their staked tokens and simultaneously earn from staking. Opting for Stader Labs offers you an edge over conventional staking techniques. To name a few:

- Liquidity: With Stader Labs, users have the liberty to access their staked tokens whenever they wish, enhancing flexibility—a significant advantage of Liquid Staking.

- Security: Stader Labs stands out with unparalleled security, validated by audits from names like Sigma Prime, Halborn, Peckshield, and Code4rena.

- Simplicity: Stader Labs's platform is designed to keep user convenience in mind, ensuring an intuitive staking experience.

- Optimal Staking Rewards: At Stader Labs, rewards for liquid staking stand out, especially when contrasted with the less lucrative rewards of conventional staking.

For those venturing into the realm of staking, Stader is a promising platform, ideal for both novices and seasoned users. Do note that the actual rewards can differ based on various elements like market dynamics, staking tenure, and staking quantity.

Also Read: Crypto Tokens

Staking's Future Landscape: Liquid vs Traditional

It's premature for us to predict the trajectory staking might take in the future. While many are leaning towards liquid staking as the dominant form, traditional staking still has its proponents. Liquid Staking offers the advantage of earning without binding tokens, whereas Traditional Staking requires users to commit their tokens for a certain period to gain rewards. This can pose challenges for those wanting to utilize tokens for different objectives.

Also Read: Ethereum Merge

Factors that could shape staking's future include:

- DeFi's Rise: The burgeoning appeal of DeFi could spur a surge in liquid staking demand, as stakers would want to engage their tokens in DeFi ventures.

- Emergence of New Liquid Staking Protocols: The possible rise in new liquid staking protocols might make it more prevalent, thereby increasing its adoption.

All in all, staking's horizon looks promising. Liquid staking is carving its niche and is anticipated to expand further. Time will reveal the preferred method in the days to come.

Frequently Asked Questions [FAQs]:

Q: Is it worth staking crypto?
A: Yes, staking crypto can offer rewards and enhance the utility of your digital assets.

Q: What is staking in simple terms?
A: Staking involves committing your digital assets to support a blockchain network's operations and in return, earning rewards.

Q: Do you make money from staking?
A: Yes, staking can offer rewards that can increase your digital assets' value.

Q: What are the cons of staking?
A: Staking might bind your digital assets, have potential risks if the platform isn't secure, and fluctuate rewards based on market conditions.

Q: Is staking income taxable?
A: Yes, staking income might be taxable depending on the jurisdiction.

Q: What is Proof of Stake?
A: Proof of Stake (PoS) is a consensus mechanism where validators are chosen to create new blocks based on the number of tokens they hold and are willing to "stake" or lock up as collateral.

Q: Is staking the right option?
A: Staking can be beneficial for those looking to earn rewards on their digital assets and support blockchain networks.

Q: What is slashing in staking?
A: Slashing is a penalty mechanism where a portion of a validator's staked tokens are taken away if they are found to be acting maliciously.

Q: Can I access my staked funds at any time?
A: With liquid staking platforms like Stader Labs, users can access their staked tokens anytime without restrictions.