An Introduction to Staking Cryptocurrency

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Cryptocurrency Staking

What is Staking?

Like any other network, blockchain networks need infrastructure to operate securely and efficiently. What differs, though, is how that infrastructure is created.

Whereas companies and governments may independently build and control their infrastructure, many blockchain networks depend on users of the network to provide resources for infrastructure and maintenance. Because of this, blockchain networks have consensus mechanisms, or incentive systems that both encourage participation in maintaining the network and keep everyone playing fair.

Staking and mining are two such incentive systems.

How Does Staking Work?

In a Proof of Stake (PoS) blockchain network, each node that helps maintain the network must stake, or prove ownership of, a certain amount of cryptocurrency. This staked amount proves that the node owners are invested in the network, and allows them to participate in new block creation (validation) and receive any associated block creation rewards, such as newly minted cryptocurrency or transaction fees for transactions in the new block.

For example, if you bought 50 PIVX and set up a node that helps maintain the PIVX PoS blockchain network, you would automatically qualify to validate new blocks and receive block validation rewards.

In addition to providing a financial incentive to help build the infrastructure of a blockchain network, staking plays an important role in keeping nodes honest. Different PoS networks have different rules, but in general, if any node tries to include a fraudulent transaction in a block they are validating, other nodes in the network will reject that block and the malicious node will no longer be allowed to validate new blocks and receive the accompanied rewards. Moreover, in many PoS networks, a node that tries to broadcast fraudulent transactions will lose any cryptocurrency it has staked.

To further enhance network security, block validators are also chosen at random, with high-stake nodes validating blocks more frequently than those with a lower stake. Random selection of node validators highly discourages any attempt to attack the network.

Staking Pools

Some PoS networks require large amounts of staked cryptocurrency in order to be eligible to validate new blocks. In these cases, network users are often able to pool their crypto together, and block validation rewards are split up proportionately to pool members.

Each PoS network has different rules on how pools operate, and some of the more interesting ones have also incorporated voting systems. In these systems, the number of nodes that can validate new blocks is limited, which further incentivizes block validators to act in the network’s best interest.

How Can I Begin Staking Cryptocurrency & Earning Rewards?

Each PoS network has its own rules for staking. With some networks, like PIVX, all you need to do is buy cryptocurrency, install a wallet application on your desktop, and keep the application open. However, with PIVX and similar networks you must download a copy of the entire blockchain, which takes up a good chunk of hard drive space.

Other networks, like ARK, don’t require you to keep the wallet program open or download a copy of the entire blockchain, but do require you to vote on a delegate if you want to earn staking rewards. The process is actually quite simple and is one of the easiest ways to earn crypto via staking.

Still other networks require large amounts of staked crypto, investment in expensive computer hardware, and/or a great deal of technical know-how to participate in the staking process.