Staking, like many things in crypto, may be a complex or simple concept depending on how many levels of the understanding you want to uncover. The major lesson for many traders and investors is that staking is a method of collecting incentives for holding particular cryptocurrencies. Even if you’re just seeking to earn some staking rewards, it’s helpful to know how and why things work the way they do.
What is the process of staking?
You can “stake” some of your cryptocurrency holdings and earn a percentage-rate reward over time if the cryptocurrency you possess enables it (current alternatives include Tezos, Cosmos, and now Ethereum (through the new ETH2 upgrade). This is commonly done through a “staking pool,” which is similar to an interest-bearing savings account.
Because the blockchain puts your crypto to work, it generates incentives while it is staked. Staking-enabled cryptocurrencies use a Proof of Stake consensus mechanism to ensure that all transactions are validated and secured without the involvement of a bank or payment processor. If you choose to stake your crypto, it becomes a part of the process.
Why is staking only available in specific cryptocurrencies?
This is when things start to become a little more complicated. Staking is not permitted in Bitcoin, for example.
Cryptocurrencies are often decentralised, which means they are run without a central authority. They rely on what’s known as a “consensus process.”
Proof of Work is a consensus technique used by many cryptocurrencies, notably Bitcoin and Ethereum 1.0. The network uses Proof of Work to allocate a large amount of processing power to issues such as authenticating transactions between strangers on opposite sides of the globe and ensuring that no one spends the same money twice.
Part of the process is “miners” from around the world competing to solve a cryptographic challenge first. The winner receives some crypto in exchange for the opportunity to upload the most recent “block” of validated transactions to the blockchain.
Proof of Work is a scalable method for a relatively simple blockchain like Bitcoin’s (which acts similarly to a bank’s ledger, tracking incoming and outgoing transactions). However, Proof of Work can generate problems in more complicated systems like Ethereum, which has a wide range of applications, including the entire world of DeFi running on top of the blockchain. As a result, transaction timings may take longer to complete.