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What is staking?

Updated on Wed, 7 Feb, 2024 at 8:26 PM

Staking is a process that consists of keeping cryptocurrencies locked in a wallet in order to receive rewards, in exchange for supporting their development.

It is similar to logging in, only in this case your tokens are locked and you cannot use them freely.

By blockchaining these cryptocurrencies, you are actively participating in improving the operation and functioning of the blockchain. In return for participating, you receive the incentive defined by each of the networks in the form of a reward, usually in the form of a native token.

On the other hand, staking allows active participation in the validation of transactions on the Proof of Stake (PoS) blockchain. In these blockchains, the user must block a minimum number of tokens in order to validate transactions and obtain rewards.

How does staking work?

Users block the minimum number of tokens required on a node to become a validator.

In PoS networks, the choice of a validating node is random. However, the chances of a node being chosen to validate a transaction (and get the reward) will be directly proportional to the number of tokens that are blocked;

If the node is elected and creates a block, the validator receives a reward. The process is very similar to mining in Proof-of-Work.

To prevent the emergence of bad actors, if a node validates a fraudulent transaction, it is penalised with a portion of the blocked tokens.

Slashing, in this case, refers to a mechanism used in some blockchain-based cryptocurrencies, such as Ethereum, to discourage malicious behaviour by network validators.

In simple terms, slashing involves the loss of some or all of the cryptocurrencies that a validator has stored as collateral (stake) to participate in block validation, if it is found to have acted inappropriately or violated the rules of the blockchain protocol. The aim is to make validators have a financial stake in protecting the security of the network and in acting honestly.

Slashing can occur for various reasons, for example, if a validator signs two different blocks at the same time, if it behaves maliciously or if it does not comply with the technical requirements of the blockchain protocol. In general, slashing is considered an important measure to ensure the integrity and security of blockchain-based cryptocurrencies.

What are the advantages of staking?

Staking reduces the energy consumption of blockchains, as no high computational power is needed to create blocks.

In addition, users have the possibility to earn rewards for their tokens, while participating in improving the blockchain. In this way, a higher return is obtained for the tokens.

The rewards obtained depend on each blockchain, as the rewards obtained for staking in Ethereum will not be the same as those obtained in Solana, and will always be proportional to the amount staked.

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