What Is Staking?

Updated: May 09, 2024 | Published: Apr 29, 2024
Verified Investing
By Verified Investing
What Is Staking?

Staking is the process of validating transactions in a Proof of Stake (PoS) cryptocurrency ecosystem. It replaces the energy-intensive and expensive coin mining used in validating transactions in Proof of Work cryptocurrencies. Staking can be run on a mid-range consumer PC, unlike costly custom-made crypto miners that employ purpose-built chips.

Staking is an attractive way to generate passive income from long-term crypto investments in PoS coins that would otherwise be sitting idle. Some people compare crypto staking to putting money into an interest-bearing savings account at a bank. Ethereum validators earned 3.1% interest on their stake in May 2024.

What Is Proof Of Stake?

Proof of Stake (PoS) is a consensus system for crypto transaction verification designed to address the environmental and economic costs of Proof of Work (PoW) coins. The Ethereum Foundation says switching to PoS has reduced the Ethereum blockchain’s energy consumption by 99.95%, decreasing global energy consumption by 0.2%. This has made Ethereum an attractive asset for ESG-focused investors seeking exposure to a major cryptocurrency.

Proof of Stake vs Proof of Work.

Proof of Work involves massive server farms racing to be the first to solve difficult cryptographic problems for the right to write the next batch of transactions and win a reward. All the power consumed by the millions of other participants is wasted. As more participants join, the formulas become more challenging to keep the average time to write a block roughly the same (10 minutes for bitcoin.)

Proof of Stake randomly assigns one participant to write the next block. The selection is often weighted according to how much crypto a participant has staked (depending on the coin.) Instead of millions of servers competing to be the one that gets the reward, only the chosen node needs to validate a transaction block. This simplicity allows an Ethereum block to be written every 12 seconds.

The efficiency gap between PoW and PoS can be illustrated by the time it takes to confirm a transaction on the blockchain. In March 2024, it took from 10 minutes to 2 hours to confirm a Bitcoin transaction (PoW.) Ethereum transactions in March 2024 took between 15 seconds and 5 minutes using Proof of Stake.

How Does Staking Work?

The foundation of Proof of Stake systems is the requirement that all participants in growing and maintaining the blockchain have “skin in the game” in the form of native currency locked up as collateral to ensure their proper behavior. The larger your stake, the greater the opportunity to earn coins for validating blocks of transactions.

The most significant downside to staking your crypto is that it is locked up for a specified length of time, even if you stop acting as a validator. This means that you can’t access it to use or sell during the lockup period. As compensation, you earn regular returns proportionate to your stake.

Validators are grouped into committees to build and validate blocks of transactions. One participant/node is randomly chosen (weighted by the amount they have staked above the minimum) to validate a group of transactions. The other nodes then confirm that all the transactions are valid until the committee reaches a majority consensus.

The node proposing the verified block receives a reward, usually of newly-created coins. The other nodes, which validated the block, are paid from the transaction fees.

Types Of Coin Staking

There are three major ways of staking PoS coins: solo, staking as a service, and staking pools. Each has its advantages and disadvantages.

While earning rewards from staking coins is easier than crypto mining, remember to do your due diligence before choosing a remote hosting or pooling service. Any option other than running a solo node opens you up to third-party risk.

Solo Staking

Solo staking involves using your own hardware and internet connection to validate transactions. The Ethereum Foundation considers solo staking as the best option for the health and security of the blockchain as it promotes decentralization. Solo staking removes counterparty risk, as you control the hardware, software, and your signing keys. As a solo staker, you keep 100% of all rewards.

As a solo staker, the largest hurdle you face is locking up the entire stake required to run a validator. For Ethereum, that is 32 ETH (worth $96,000 at an ETH price of $3,000.) The second issue is buying or building a computer for use as a dedicated node and keeping it online 24/7. Extended hardware, power, or connectivity problems can put some or all of your stake at risk.

Staking As A Service

With Staking as a Service, the service provider furnishes the hardware and internet connection for you to run a solo validator. You still have to furnish the entire solo stake. You will earn the same returns as if you were running the hardware yourself, minus the fees to the service provider. The risks of using a staking service are that hardware failures of your rented server or the service being knocked offline can result in penalties being charged to your stake. You will also need to give the service provider your signing keys.

Staking Pools

Staking pools run much like the familiar “mining pools” for PoW coins. The difference is that everyone pools their crypto into a shared stake instead of contributing their computing power to mine coins. Pool participants are awarded a share of the rewards proportional to their stake. The payouts in staking pools are smaller than SaaS due to the overhead of operating the pool. The big benefit is that you only need to supply a tiny fraction of the solo stake to participate.

Staking pools are completely passive income, similar to what you get from a yield-bearing savings account at a bank. The pool operators take care of the hardware, uptime, and validating transactions. Remember that staking pools carry substantial counter-party risk. The safety of your crypto depends on who is running the pool and their security against hacking. They have access to your crypto and your signing keys.

Staking With Crypto Exchanges

Staking coins at your crypto exchange is the same as participating in a staking pool on a massive scale. They are open to any customer, instead of the limited availability inherent with most private staking pools.

However, participating in a pool on a crypto exchange may be the riskiest of all methods of staking. Crypto exchanges are huge targets for hackers and don’t always have the latest and greatest countermeasures.

Which Coins Are PoS?

CoinMarketCap lists 84 proof of stake cryptocurrencies. The top 5 by market cap (with their ranking among all coins) are:

  • Ethereum (2)
  • Solana (5)
  • Toncoin (9)
  • Cardano (10)
  • Polygon (18)

What Hardware Do I Need For A Staking Node?

Instead of sinking tens of thousands of dollars into hardware to mine PoW coins, the solo staker can validate blocks of transactions on a mid-range consumer PC. The minimum hardware requirements needed to run a staking node are:

  • At least a quad-core CPU with a CPU Benchmark score of 6667 (eight cores and faster recommended);
  • At least 16GB of RAM (32GB of DDR4 RAM is recommended, with more being better);
  • A dedicated 2TB SSD hard drive (old-style platter HDDs are NOT fast enough to keep up with blockchain activity.)

No gaming graphics card is needed. The cost savings of using the onboard graphics chip will pay for most of the computer.

In addition, you will need:

  • The necessary staking software;
  • a reliable 24/7 high-speed Internet connection running 10Mbps both up and down;
  • An ISP plan with no data cap (a node can use as much as 2TB of bandwidth a month);
  • A large UPS to power your computer and router during temporary power outages.