What is staking and how does it work?

El staking has become a fundamental part of the ecosystem of decentralized finance, especially with the rise of networks based on Proof of Participation. Next, I'll explain in detail what the staking, how it works and what aspects you should consider before participating.

Definition and fundamentals of staking

El staking is a mechanism used by cryptocurrencies that operate with the Proof of Participation protocol (Proof of Stake or PoS) to verify and validate transactions in the blockchain. Unlike networks that rely on Proof of Work (Proof of Work), the staking allows those who participate to earn rewards by locking their cryptocurrencies in specific wallets.

In essence, the staking It is a process where the participants of a network blockchain receive rewards for locking their coins in wallets. These coins are then used to validate transactions on the network or as a source of liquidity for other users. The main idea is that the participants have a direct interest in ensuring that the network works properly and is secure, since, so to speak, they “risk their skin” with their assets blocked.

The term”staking“comes from English”Stake“, which we could translate as “participation” or “bet”. And the thing is that users “bet” their Tokens to aid the safety and operability of the blockchain, receiving compensation for their help in return.

Differences with the model Proof of Work

Unlike the Proof of Work protocol, which uses Bitcoin and other currencies, where miners compete by solving extremely complicated mathematical problems using an enormous amount of computing power and energy, the staking in PoS networks you don't need so much energy. Instead of miners, PoS networks use validators, which are chosen based on the amount of cryptocurrencies they have locked in the system.

This key difference makes networks based on staking are much more energy efficient and, potentially, more capable of growth than their Test of Work equivalents.

How does staking work?

Basic mechanism

To understand how it works the staking, we can compare it, in a simple way, with a lifetime savings account. Just like you put money in a bank and it gives you interest while it's there, in the staking you lock your cryptocurrencies in a special wallet and receive rewards for it.

To participate, users must set up a wallet that is compatible with the project in question. When doing staking, coins are “delegated”; this means that they are still under the user's control, but are used to support the network. It is important to emphasize that, in a system of staking legitimate, the coins are not physically transferred to another entity, but rather remain in the user's wallet.

The validation process

Consensus in a PoS network is achieved through validators that lock your coins. These validators are participants that are randomly chosen using algorithms to check if the transactions are valid and correct.

To be a validator, participants must deposit a minimum amount of cryptocurrency from the network or the Token native in a wallet connected to the blockchain. Once they have configured their customers and secured their system, validators are randomly selected to validate blocks of transactions.

The capital that validators block works like a bond, which they risk losing if they act dishonestly. This mechanism reinforces the commitment to act ethically and for the good of the network, since improper behavior can lead to the loss of security through a process known as”Slashing”.

Types of staking and methods of participation

There are different ways to participate in the staking of cryptocurrencies, designed for the needs and technical capabilities of different types of users:

• Solo staking (Staking only)It's the option for technically savvy users who want to operate their own validator node. Doing so allows you to maintain total control over assets and receive 100% of the rewards, but it requires maintaining the equipment and ensuring constant uptime to avoid penalties.
• Staking as a Service (SaaS)In this model, a third party is responsible for operating the validator node for you. The investor maintains custody of their cryptocurrency wallet, but pays a fixed commission or a percentage of the rewards to the delegate for their services.
• Staking through Exchanges centralizedMany centralized exchange platforms offer services of staking that pool customer deposits to form Pools of staking. This option allows more people to participate with low minimum requirements, but it involves entrusting your assets to a third party.
• Liquid staking (Liquid staking)El staking liquid is a novelty that allows users to obtain Tokens representative (sometimes called Receipt Tokens) of its assets in staking. these Tokens can be used in other DeFi applications while their original cryptocurrencies continue to generate rewards of staking. For example, by depositing ETH on protocols such as Lido Finance, users receive stETH that they can use in other decentralized financial activities.

Benefits and rewards of staking

Generation of passive income

La main advantage of staking is the possibility of earning passive income in the form of additional cryptocurrency rewards. These rewards are usually paid in the same cryptocurrency that you deposit to make staking.

The reward rates vary depending on the cryptocurrency and can be quite interesting. For example, according to recent data, the Dapp by Reental has a historic APR of 5.99%

Contribution to network security

By participating in the staking, users actively help maintain the security and operation of the blockchain. The capital blocked by participants acts as a brake against attacks, since validators have an economic incentive to behave honestly.

‍Higher energy efficiency

Proof of Participation based networks are considerably more energy efficient than Proof of Work networks, making them more environmentally sustainable.

Staking risks and considerations

Market volatility

The main risk of staking is the volatility inherent to the cryptocurrency market. Although a user can earn, for example, 10% APY with the staking, if the value of the cryptocurrency drops 20% during that time, the end result will be a loss, despite the rewards obtained.

Lockdown periods

Muchos protocols require that assets be locked for specific periods, during which they cannot be transferred or sold. This can be a problem if the price of the cryptocurrency falls sharply during that period and the user is unable to react to market conditions.

Risk of Slashing ‍

El Slashing It is a penalty mechanism that can cause part of the assets to be lost in staking if a validator acts in a dishonest manner or has technical flaws. This is an automatic deduction of part of the validator's economic participation if they behave in a way that could damage the network, such as validating invalid blocks or signing two different blocks for the same period of time.

Technical and smart contract risks

It exists the risk of computer attacks or platform failures that can directly affect investments. In addition, the protocols of staking they often rely on smart contracts that could have vulnerabilities.

Counterparty risk

When It is done staking through centralized or third-party services, there is an additional risk related to the trust placed in these intermediaries.

How to Stake with Reental

Staking with Reental? Easier than you think! In this video I show you how to do it in a few minutes so that your tokens don't stop growing. Let's do it!”

Staking is, without a doubt, a great advance in the world of cryptocurrencies and is presented as an option that consumes less energy than the classic Proof of Work. By staking, people who hold cryptocurrencies can lend a hand to make blockchain networks secure and work well and, incidentally, earn rewards without having to do much else.

However, as with any cryptocurrency investment, staking has its risks, and it's very important to stop and think about them. The fact that the market rises and falls all at once, the times you have to leave your coins locked, the danger of slashing or the technical failures that may arise are things to keep in mind before deciding to put your assets at stake.

More and more blockchains are using consensus systems based on Proof of Stake. That's why staking will continue to be increasingly important. It's a way of getting into the crypto world that not only helps users one by one, but also makes decentralized networks more secure and can be maintained in the long term.

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