What is staking?

October 14, 2022
October 14, 2022
What is staking?

Staking is a feature of Proof of Stake (PoS) blockchains where token holders, also known as delegators, can delegate their assets to support the maintenance of a protocol’s security in exchange for rewards. The delegators’ assets are staked to validator nodes and are subsequently used to check transactions, verify on-chain activity, maintain records and produce new blocks on the blockchain. The more assets that a validator has staked or the longer the amount of time they have staked those respective, the higher their chances are of being chosen to validate a transaction and receive rewards.

When token holders want to stake and unstake their assets, some protocols impose what are called “bonding” and “unbonding” periods. Bonding is the process of staking tokens to the network. The bonding period is the duration of time where tokens are delegated to the network but are not yet earning rewards. Unbonding is the process of unlocking tokens from the network. The unbonding period is the duration of time it takes for delegated tokens to be completely released back to you. The bonding and unbonding periods are set by the respective protocols and vary in length of time. Some protocols such as SOL and ADA have very short unbonding periods, while others such as ATOM and DOT have longer ones.

Advantages of Staking:

  • Staking can provide a passive income stream as rewards are given out based on the number of tokens staked.
  • Staking can increase the security and efficiency of a PoS blockchain as it fosters network participation by encouraging validators to provide the computing power necessary to maintain the blockchain network’s overall security, uptime and accuracy.
  • Since staking requires token holders to lock up their assets for a pre-set amount of time, it can also help reduce the volatility of the PoS blockchain.

Risks of Staking:

  • If the price of the staked asset falls, then the value of the rewards earned will also fall.
  • There is always a risk that validators may act dishonestly or fail to uphold their responsibilities, which could lead to slashing being imposed by the respective network. Slashing is a penalty mechanism, usually entailing the loss of a predefined percentage or a fixed amount of a validator’s stake, used by PoS protocols to keep the networks secure and running smoothly.
  • Some PoS blockchains also require an unbonding period, where the staked tokens cannot be moved for a period of time. As such, they may miss out on potential gains if the price of the asset rises.

How do I stake my crypto?:

  • To stake, token holders must first choose a validator they wish to delegate their assets to. There are a lot of considerations to consider when selecting a validator such as the uptime, community support, team make up governance support to the protocol etc.
  • They will then need to send their staking transaction through a wallet or an exchange that supports staking.
  • Once the transaction is processed, the staked assets will be locked up and the token holder will start earning rewards. Rewards are typically paid out on an ongoing basis, such as weekly or monthly.If you stake directly to a validator, the schedule is defined by the protocol itself.
  • For staking through an exchange, the exchange will be responsible for screening and selecting a trusted validator. The staking reward will be distributed to the token holder after a commission is deducted by the exchange. The payout schedule will be set by the exchange.

Currently, Newton does not provide the ability to participate in the staking functions of any tokens to earn staking rewards. However, staking can be a great way for Canadian cryptocurrency holders to earn passive income and support the security of Proof of Stake blockchains. It is always important to understand the risks involved before getting started. If you're interested in staking your cryptocurrencies, be sure to do your research before embarking on your staking journey.

And on that note, we have an exciting announcement coming your way. Keep an eye on our socials! ;)

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