Staking cryptocurrencies: from theory to practice

Why is Staking Needed in Modern Blockchain

Staking is a mechanism that allows digital asset owners to participate in the network's operation and earn income. Essentially, you lock up your coins, help the network function securely, and in return, you receive cryptocurrency rewards. This has become a popular source of passive income for long-term investors who want to maximize the returns on their assets.

Staking is only possible in networks with a Proof of Stake consensus mechanism (PoS). Such blockchains include Ethereum, Solana, Cardano, Avalanche, Polkadot, Cosmos, and many others. Meanwhile, Proof of Work networks (PoW), like Bitcoin, use energy-intensive mining.

How the Proof of Stake Mechanism Works

Proof of Stake is an alternative to traditional mining that emerged in 2011. Instead of complex computations, PoS uses a different approach: validators are chosen based on the amount of coins they are willing to lock in the network. This significantly reduces energy consumption and makes the network more eco-friendly.

The main difference from Proof of Work is that in PoW miners solve mathematical problems, consuming colossal resources. In PoS, however, validators simply hold their assets in the network — this is much more efficient.

The Mechanics of Quality Staking: Participation Stages

The staking process on different blockchains may vary slightly, but the general scheme looks like this:

Validator Selection: The network selects participants based on a combination of factors — the size of the stake, the duration of active staking, and sometimes randomness. This prevents the monopolization of power.

Transaction Validation: the selected validator checks and confirms transfers, ensuring the integrity of the network. All participants can be confident in the authenticity of transactions.

Block formation: verified transactions are grouped into a block, which is added to the blockchain as a distributed ledger.

Reward Distribution: Validators receive a portion of transaction fees and newly minted coins for their diligent work.

Staking Participation Options: From Simple to Complex

There are several ways to start staking, designed for different levels of preparation:

Independent staking: you run your own node and become a validator. This gives complete control but requires serious technical skills and responsibility. A mistake can lead to penalties (slashing) and loss of funds.

Quality staking through platforms: many crypto platforms offer built-in staking services — you simply transfer your assets and receive daily rewards. This is the most convenient option for beginners, requiring no technical knowledge.

Delegated staking: you entrust your coins to a selected validator or specialized service. Some altcoins embed this function directly into native wallets, simplifying the process.

Pooling resources: by joining with other investors in a staking pool, you increase the chances of block validation without the need to run your own infrastructure. Rewards are distributed proportionally to contributions.

Staking Pools: Collective Strategy

A staking pool is a group of cryptocurrency holders who combine their resources to increase the chances of receiving rewards. Such pools are especially beneficial for small investors who do not have enough coins to meet the minimum requirements of individual networks.

Before joining a pool, it's important to conduct thorough research: fees vary, and the level of security differs. A reliable pool is key to keeping your assets safe.

Liquid Staking: Staking without Freezing Assets

Traditional staking requires locking coins for a certain period, which reduces flexibility. Liquid staking is an innovative approach where you deposit assets into staking while simultaneously retaining the ability to use them.

How does it work? You are issued liquid staking tokens (LST), representing your locked assets. For example, Lido issues stETH in exchange for ETH in staking — you continue to receive rewards for the original Ethereum, but at the same time, you can trade, sell, or use stETH in DeFi applications.

There is also native liquid staking, where the platform does not issue a separate token. ADA on the Cardano blockchain is a prime example of this approach. Users receive all the benefits of staking without liquidity restrictions.

Why Staking Attracts Investors

Passive Income: By depositing assets, you receive additional cryptocurrency — this is a great way to increase your portfolio without trading risks.

Supporting the ecosystem: by participating in staking, you strengthen the security of the network and contribute to its development.

Impact on Governance: in some networks, stakers gain voting rights, influencing future upgrades and decisions.

Eco-friendliness: staking consumes minimal energy compared to PoW mining.

Critical Risks That Cannot Be Ignored

Staking is attractive, but far from safe:

Market volatility: if the price of your asset drops significantly, the rewards from staking may not offset the losses.

Slashing Risk: Validators that act incorrectly or violate rules are penalized and lose part or all of their stake.

Network Centralization: if several large validators concentrate the majority of coins, it threatens decentralization and security.

Technical glitches: smart contracts contain errors, software crashes, access to funds may be frozen.

Dependence on intermediaries: by using a staking platform, you entrust your funds to it. Hacking or fraud can lead to asset loss.

How to Start Staking in 2024: Step-by-Step Guide

Step 1: Choose a PoS cryptocurrency
Determine which network you will be staking on. Study the requirements for the minimum contribution, the size of rewards, and the lock-up conditions.

Step 2: Open a supporting wallet Use popular wallets — Web3 interfaces, MetaMask, TrustWallet. Make sure the wallet you choose is compatible with your blockchain network.

Step 3: Start the activity Choose a method: run a node, delegate assets to a validator, or join a pool. Follow the network instructions.

Focus on well-established blockchains like Ethereum and Solana. Conduct your own research before investing.

How Staking Rewards Are Calculated

The amount of rewards depends on:

• Volume of locked coins
• Duration of participation in staking
• Total number of coins in the network for staking
• Transaction fees and inflation rate

Many blockchains offer fixed interest rates, making it easier to predict income. Rewards are often expressed through an annual percentage rate (APR), allowing for the comparison of different opportunities.

Can assets be withdrawn from staking

In most cases — yes, but with reservations. The mechanism and rules depend on the specific network and platform. Sometimes early withdrawal results in the loss of part or all of the rewards.

After the Ethereum Shanghai upgrade in 2023, participants can freely withdraw ETH from staking on the Ethereum network. ETH holders automatically receive rewards and have the option to withdraw their assets at any time.

Why Not All Cryptocurrencies Support Staking

Staking is available exclusively in PoS blockchains. Bitcoin and other PoW networks do not support this mechanism. Even in PoS networks, not all assets provide for staking — different projects use various systems to incentivize users.

Final Thoughts

Cryptocurrency staking offers a real opportunity to earn passive income from your assets while supporting blockchain ecosystems. However, it is not without risks — market volatility, the threat of slashing, technical failures, and reliance on platforms require caution.

If you have decided to participate in staking, carefully study the available options, choose reliable networks and platforms, and assess your readiness for risks. Staking can become a strategic part of your investment portfolio if you approach it responsibly.