What is Staking?

By iTrustCapitalAugust 08, 20223 minutes read
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What is Staking?

Staking is the way that certain cryptocurrencies validate transactions on the blockchain. These cryptocurrencies use “proof of stake” rather than “proof of work” to validate transactions. Staking allows validator nodes to validate transactions. Individuals who are not validators can delegate their cryptocurrency to validator nodes on a proof-of-stake blockchain. While your cryptocurrency is staked, you may not buy, sell, or otherwise transact in the staked asset. In return, you may potentially earn rewards if the validator successfully validates a transaction on the blockchain using your staked assets.

How does it work? The validator “stakes” a certain amount of cryptocurrency which is “locked”, and used to validate transactions. The validator that successfully validates a transaction can earn a reward on a stake, providing incentive to become a validator. Inaccurate information from validators will result in the validator’s stake being partially or fully taken away, known as slashing. This provides further incentive for validators to abide by the blockchain rules.

It takes a considerable amount of cryptocurrency to stake on some platforms, so validators often use “pools” of cryptocurrency to stake. Individuals “delegate” their cryptocurrency to the validator, often called a staking services provider, and the validator uses the pool to attempt to validate a block on the proof-of-stake blockchain.  If the validator is successful, the rewards are shared among the pool. In this manner, many people can earn rewards on their collective pool of cryptocurrency. 

Because these staking pools exist for certain crypto assets, staking service providers can act as a pool for their users to stake cryptocurrencies. In this manner, platforms that offer crypto assets can allow users to potentially earn rewards via staking, without needing those individuals to become validators themselves.

About Proof-Of-Stake

Proof-Of-Stake is a consensus protocol that allows blockchains to validate transactions. Each new transaction added to a block must be verified to avoid double spending and other technical issues, as well as maintain precise accuracy on the chain. As new transactions come in, they are grouped into blocks, which are then validated by nodes.

Early concepts of consensus in crypto came with what is known as Proof-of-Work. This is the consensus protocol Bitcoin uses. Proof-of-Work (PoW) uses vast amounts of energy and computing power to solve complex mathematical functions using computers. Once a problem is solved by a node, typically called a bitcoin miner, the “work” is verified to be correct by other miners. Once this work is verified, the block of verified transactions is added to the chain because it has shown “proof of work”. The chain is essentially an immutable, public, digital ledger. This process of validation takes about 15 minutes, which is a long time in our era of instantaneous digital computing, showing just how intensive the work is. Importantly, the first node to solve the work is rewarded, so it becomes a race of who has the fastest and most powerful computing system. The PoW consensus protocol has proven to be a solid blockchain foundation and has been copied in many other crypto blockchains. Its drawback, however, is that it doesn’t allow a more complex blockchain to scale very efficiently.

Bitcoin’s blockchain is made up of transactions, and the chain functions as a checkbook of sorts. In blockchains that support smart contracts, however, there are more than just transactions occurring. 

Proof-of-Stake (PoS) offers a quicker and more energy efficient consensus protocol than Proof-of-Work, which can allow a smart contract-enabled blockchain to scale in size. For example, the Ethereum blockchain is currently undergoing a major overhaul to eventually transition from Proof-of-Work to Proof-of-Stake, so that it can continue growing and supporting applications. This has not occurred yet, but has been announced to be in development.

In PoS, rather than racing to be first, validators are chosen to validate a block based on the amount of stake they hold, the longevity of their stake, or through various other criteria such as empirical accuracy of validation. Once a block is validated, it is sent to other validator nodes to confirm its accuracy.  All validators who participate in this process are rewarded with staking rewards. In this way, more people are able to participate at any given time in the consensus protocol. Because this PoS system is able to work faster than PoW, smart contract-enabled blockchains can use it to continue growing their network without slowing down the time it takes to add a block of information.

Proof-Of-Stake’s quick validation time and less singular reward system has made it popular among newer blockchains.

Want to know more about staking with the iTrustCapital Software Platform? Visit our Walkthrough here!

Staking involves considerable risk. Please see our Staking Terms of Service and Risk Disclosures here, and our Staking FAQs here.

DISCLAIMER

This article is for information purposes only.  It does not constitute investment advice in any way. It does not constitute an offer to sell or a solicitation of an offer to buy or sell any cryptocurrency or security or to participate in any investment strategy.  

iTrust Capital, Inc. is not an exchange, funding portal, custodian, trust company, licensed broker, dealer, broker-dealer, investment advisor, investment manager, or adviser in the United States or elsewhere. iTrust Capital, Inc. is not affiliated with and does not endorse any particular cryptocurrency, precious metal, or investment strategy.  

Cryptocurrencies are a speculative investment with risk of loss. Precious metals are a speculative investment with risk of loss. Staking involves considerable risk. Cryptocurrency is not legal tender backed by the United States government, nor is it subject to Federal Deposit Insurance Corporation (“FDIC”) insurance or protections. Clients do not receive a choice of custody partner. The self-directed purchase and sale of cryptocurrency through a cryptocurrency IRA have not been endorsed by the IRS or any regulatory agency. Historical performance is no guarantee of future results.  

Some taxes and conditions may apply depending on the type of IRA account. ​​Investors assume the risk of all purchase and sale decisions. iTrust Capital, Inc. makes no guarantee or representation regarding investors’ ability to profit from any transaction or the tax implications of any transaction. iTrust Capital, Inc. does not provide legal, investment or tax advice. Consult a qualified legal, investment, or tax professional. 

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