Decentralized Finance: How Does Staking Work? – Detailed

How does staking in decentralized finance work? This is the question that everyone is asking, and if you are one of them, this post has the right answer. Staking is an umbrella term used to indicate the act of pledging (committing) a person’s crypto assets to a crypto network to earn a reward. Therefore, a user is allowed to participate in securing a blockchain network for a reward. However, it can be a pretty complex idea, and it will be a good idea to start by digging deeper into staking and how it works. 

A Closer Look at Staking

If you own a cryptocurrency that supports staking, such as Ethereum and Tezos, it is possible to stake some of your coins and get a percentage in reward over time. This is done through a staking pool, which works like a savings account. Why the reward? 

The reason stakers are rewarded is that the stakes they commit are used to define how the respective blockchains operate. For cryptocurrencies that use staking consensus systems, the staking nodes help to verify transactions securely. This implies that the transaction, such as sending money, is verified without involving a payment processor, such as a bank or credit card firm. Therefore, your stake becomes part of this process of verifying transactions on the blockchain. This is why you are rewarded.

Do All Cryptocurrencies Have and Allow Staking?

It is not all cryptocurrencies that allow staking. For example, Ethereum allows staking while Bitcoin does not. To explain this, let us go back into the basic mechanics of cryptocurrencies. 

Cryptocurrencies work as decentralized networks, implying that they operate without requiring a centralized authority, like a bank. The nodes (computers on the network) work in harmony using a process referred to as a consensus mechanism

Most cryptocurrencies, such as Bitcoin, Dogecoin, and Ethereum 1.0, use a consensus mechanism referred to as proof-of-work (PoW). However, PoW nodes require a lot of processing power to validate transactions initiated by users on the network. To get involved in PoW, miners compete to solve complex cryptographic puzzles and the first to get it right earns the right to add the latest block on the blockchain for a reward. PoW works well for pretty simple blockchains, such as Bitcoin. 

When dealing with more complex blockchains, such as Ethereum, which have multiple layers of Decentralized Finance networks, a more advanced method of confirming transactions is required. This is where staking comes into play. 

Proof-of-Stake in Decentralized Finance 

The whole idea of proof-of-stake system was to address the challenges experienced from proof-of-work. Particularly, it helps to increase the speed of transactions and efficiency while keeping the fees as low as possible. To do this, proof-of-stake does not require miners to follow complex processes of solving mathematical puzzles, which requires a lot of energy. Instead, it is those people who have invested in the blockchain who get to validate the transactions through staking for a reward. 

To start staking, you need to join a selected crypto network that supports staking. Then, purchase a minimum number of coins to become a validator and also have a dedicated computer. Take the example of Ethereum. To become a validator, you are required to acquire 32 ETH and a computer that can run to validate transactions without downtime. If the above method looks complex, it is still possible to participate using a pool. So, are you ready to start staking? Visit us on this website to learn more and let your stake work for you!

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