What is staking?

For many, staking allows participants to earn rewards for holding certain cryptocurrencies or tokens. It can be a complex concept, particularly due to the unique technical terminology that comes with it. It is crucial to understand the basics of staking, to make informed decisions and, hopefully, healthy staking rewards.

Who is involved?

To understand the process of staking, it is important to first understand what types of participants are involved in the process. Validators and delegators are both key participants in a proof-of-stake (PoS) blockchain network.

Validators are individuals or organizations that run the software required to validate transactions and produce new blocks in the blockchain. Their main responsibility is to confirm the authenticity and accuracy of transaction records, ensuring that only valid transactions are added to the blockchain.

While some individuals or organizations choose to run their own validator node and become a validator themselves, others opt for a different approach known as “delegation.” Delegators, as they are called, own the assets and want to participate in the network’s consensus mechanism to earn rewards but without the responsibility of running their own validator node. Instead, they delegate their assets to a validator who then uses their staked assets to validate transactions and produce new blocks on their behalf. It’s important to note that, while you still own your assets, they will be locked and unavailable while staked.

Staking is a process

The exact process of staking varies, depending on the cryptocurrency and blockchain, but the underlying principle remains the same; validators are chosen to verify transactions and add them to the blockchain. The more assets a validator holds, the greater their chances of being chosen to validate a block. When a new block of transactions is created, it is broadcast to the network for validation. Validators check to see that the block follows the network’s rules and protocols and that the sender’s digital signatures are accurate. Once validated, the block is added to the existing chain, thereby adding a new block and updating the state of the ledger. By validating blocks, validators contribute to the security and reliability of information stored on the blockchain.

Once tokens are “locked” or “bonded,” they can’t be transferred or sold for a predetermined amount of time. While assets are locked, delegators are typically rewarded with a portion of transaction fees and/or tokens designated to be used as an inflationary mechanism. They may also receive pre-allocated rewards in exchange for their efforts. To regain access to their assets, they must initiate a process known as an “unbonding.” During the unbonding period, assets are no longer being staked and are not eligible to receive rewards. Once the unbonding period has ended, the previously staked assets become available.

Unlike proof-of-work (PoW), the PoS mechanism does not require significant energy consumption and is considered more environmentally friendly. PoS networks do not require any special hardware or resources; instead, the validation process is determined by how many native tokens a delegator has and how long they have held onto them. Additionally, PoS systems are less susceptible to centralization by large crypto mining pools and can offer a more stable and predictable reward for delegators.

The pros and cons

Staking has several potential benefits that can make it an attractive option for cryptocurrency investors. One of the main reasons to stake is to generate rewards. Long-term token holders can allow their assets to generate rewards instead of collecting dust. This is especially beneficial as a hedge against inflation. Many protocols have no maximum supply — meaning that, in general, as the supply increases, the overall value of their holdings declines.

An additional reason to stake is the ability to participate in protocol governance. Validators and delegators are not only contributing to the security and efficiency of the blockchain project they support, but delegators also have the opportunity to vote in governance proposals and help steer the direction of the blockchain project. This gives network participants a sense of ownership and investment in the project as well as the ability to shape its future.

It’s also important to be aware of the potential risks and downsides of staking. Depending on the cryptocurrency and the staking process, you may be required to lock up your tokens for a certain period of time, which means you won’t be able to transact during that time. This can be a significant risk for those who need liquidity or want complete control of their crypto assets.

It’s worth noting that not all cryptocurrencies support staking. Staking can also be vulnerable to hacking, phishing, or other malicious behaviors, so it’s important to do your due diligence and choose a trustworthy and secure validator, platform, and wallet provider.

Staying safe

Since the FTX collapse, the staking landscape has undergone a significant transformation. The incident caused a shift in the way people think about staking as trust in popular cryptocurrency exchanges and centralized exchanges was shaken. The collapse has led to an increased focus on security and transparency in the staking industry with many platforms now implementing stricter measures to protect users’ assets and ensure the safety of their funds. Many platforms have started to offer insurance for staked tokens and enhanced layers of security to protect users’ assets. Additionally, the blowup has led to a greater demand for decentralized staking options where users can stake their tokens without the need for a central intermediary.

Whether you want to stake tokens directly on-chain as PoS, deposit tokens with a custodian platform, it’s essential to factor in security protocols upfront and ensure appropriate safeguards are in place to protect your digital assets. Never use an unsecured network or crypto wallet that could be vulnerable to malware attacks and always invest time exploring the highest level of security measures before making any final decisions.

Choosing institutional staking with BitGo

When you stake at BitGo, our platform offers a simple and flexible solution for earning rewards on your digital assets. With one-click staking, you can start earning rewards immediately from your BitGo crypto wallet, and see all your staked assets from a single view. With a variety of supported assets and a choice of using our default validator or our MMI integration, you can tailor your staking experience to your specific needs. Delegate with confidence, knowing that your funds are protected and uptime is maximized to generating the most rewards possible.

BitGo currently supports staking for the following coins: Algorand, Avalanche, Casper, Dash, Ethereum, NEAR Protocol, NuCypher, Polygon (ERC-20), SKALE Network, Solana, Stacks, and Tezos.

Get Started

Submit our staking form and a member of our team will reach out shortly, or connect with our team at sales@bitgo.com