All you need to know about crypto staking and why people are jumping on this bandwagon

  • Cryptocurrencies are increasingly moving to or using the proof-of-stake protocol for mining, and hence there’s a new concept emerging.
  • PoS systems are largely considered to be the future of crypto consensus mechanisms.
  • Staking also keeps miners honest.

Those who joined the crypto bandwagon early on have it good today, and their riches have brought in more users over time. But with more users, the price of crypto rises, and so does the amount of computing power that miners put into validating transactions and creating new cryptocurrencies. At the time of writing, the prices of Bitcoin and Ether were above ₹32 lakh and ₹2 lakh, respectively, on
WazirX, India’s largest crypto exchange by trading volumes.

But all this computing power is generated using electricity, which is most often generated using fossil fuels that impact the environment. To mitigate that, proof-of-stake (PoS) was introduced, which is a system of mining cryptocurrencies that reduces the overall impact crypto mining has on the Earth’s climate. And under proof-of-stake, comes a new concept called staking.

What is staking?

In the traditional trading space, staking would probably mean loaning someone money to buy stocks. In crypto, however, the term refers to putting up one’s own cryptos, in order to earn the right to get a share of the rewards that come from mining cryptos.

You see, the way PoS reduces crypto’s carbon footprint is by reducing the overall number of miners who will be rewarded for lending their computing power to a blockchain platform. And it does so by looking at the total amount of stake that miners put up.

Essentially, in a PoS system, the platform can allow an infinite number of validators to join the system, but only the largest stake providers will have the chance to earn a reward from validating a transaction. And even amongst the largest stake providers, only the ones who are the fastest will win, meaning the need to provide all of one’s computing power is reduced, along with the total electricity required.


How does staking work?

As mentioned above, the more tokens a miner pledges, the better their chances of being rewarded with cryptocurrencies. The tokens the miner puts up still belong to you, the blockchain protocol simply holds them in order to determine the miner’s rank amongst all the stakeholders in the system. The miner can choose to increase or reduce their stake at any given time.

The stake a miner puts up is also a guarantee of sorts from the miner that they won’t make mistakes in their job. In some protocols, the platform can cut a part of the miner’s stake if they make mistakes. Miners who are dishonest or not performing can also be penalized for the same by cutting their stake, and the process is known as “slashing”.

How to stake your own crypto

The concept of staking isn’t available in all blockchain platforms, only the ones that use the PoS system. Which means that a miner can’t suddenly put up a stake on the Bitcoin protocol because it’s based on the proof-of-work system.

At the moment, the most popular PoS systems in the world are Cardano, Polkadot, Solana, BSC (formerly Binance Smart Chain), and soon Ethereum too. Ethereum currently has both PoS and PoW systems but will move to the PoW system completely when the Ethereum 2.0 platform rolls out.

Each platform will have its own rules for staking, so miners will need to learn what these rules are, and how slashing will work as well. These should be available on the platform’s whitepaper and website.

To start putting up their own stake, miners will need to first buy the required cryptocurrency from an exchange that sells it. While not a lot of mining happens from India, if it did, a miner would likely go to an exchange like WazirX to buy Cardano to put up a stake on the Cardano protocol. They will have to transfer the tokens from the exchange to their own wallet as well.

The stake is created by transferring the requisite tokens from the miner’s wallet to the staking pool that a protocol maintains where stakes from all the miners in the system are combined.

Here’s a quick look at the advantages and disadvantages of crypto staking.


Pros:

  • Allows long term asset holders to make their crypto holdings work for them
  • Reduces computing power and environmental validity of blockchain platforms
  • Increases security of crypto projects and makes them more resilient to 51% attacks

Cons:

  • Stakes tokens are often ‘locked’, meaning they can’t be traded or used for anything else
  • Taking staked coins out of the staking pools can take up to a week at times
  • The platform can penalise validators by cutting staked tokens if a mistake is made

Disclaimer: This is a sponsored post in partnership with WazirX. Cryptos are unregulated virtual assets, not a legal tender, and subject to market risks.