Staking is an increasingly popular concept in the crypto space that allows you to earn rewards for simply holding your crypto assets. It utilizes a proof-of-stake system which rewards users for “staking” (or locking up) their crypto coins—typically held in a digital wallet—in order to maintain and secure a blockchain network.
Staking works on the premise that validators (stakers) who have skin in the game (staked coin) and some technical requirement fulfillment are trustworthy in helping to grow and maintain the network. Instead of miners who use their computing power to solve the complicated mathematical puzzles and confirm transactions on the blockchain, stakers get rewarded for their contribution to the blockchain’s growth and trustworthiness.
Staking can be likened to earning interest at a bank, but with a higher degree of profitability. Rewards are often significantly higher than rates in traditional savings accounts. This reward mechanism allows blockchain networks to keep growing and be more efficient as they transition from proof-of-work to proof-of-stake consensus models.
As with any investment, there is some risk involved with staking coins. The price of the coin that is staked can go up or down, so there is potential to lose money if the market price drops. Additionally, there may also be technical requirements that need to be met in order to successfully participate in staking, so understanding a blockchain’s requirements is key to successful staking.