Staking. A primer.

Earning From Your Tokens

Cryptocurrencies that allow staking use a “proof of stake”, or “PoS” for short, consensus mechanism.
A consensus mechanism is the process used to make sure transactions are verified and secured without the use of any middleman, bank, or payment processor.
If you stake your cryptocurrency, it becomes part of this process.
It provides a way for holders to earn rewards and to help secure the network which can make tokens more valuable as well.
It’s similar to an interest-bearing savings account.

More On Consensus

Typically, cryptocurrencies are decentralized, utilizing a peer-to-peer network.
All of the computers in the network have a “consensus mechanism” that allows them to arrive at an agreement as to what transactions are valid and the contents of the distributed ledger, or blockchain.
This is all done without having it fed to them by a central authority like a bank or credit card company.
“Proof of Work” or “PoW” is another type of consensus mechanism, which is used by the bitcoin network. It is an energy intensive process requiring computers (miners) to churn through math problems to validate transactions.
PoS emerged with the idea of increasing speed and efficiency while lowering fees.
PoW and PoS each involve a network participant getting selected to add the latest batch of transactions to the blockchain and being rewarded with cryptocurrency.
In a PoS system the holders commit tokens for the opportunity earn rewards and help secure the network.

Full Validator Vs. Joining A Staking Pool

Becoming a “full validator” can require a substantial minimum investment (32 ETH eg), technical knowledge, and a dedicated computer that can perform validations day or night without downtime.
Participating at this level comes with security considerations and is a serious obligation.
If transactions to a new block are discovered to be invalid, users can have part of their stake burned by the network. This is known as a “slashing event.”
Most investors instead contribute to a “Staking Pool”
The minimum investments, if there are any, are lower. You don’t need to run a full validator node.
Your tokens are combined (pooled) with tokens from other investors and delegated to a full validator who then distributes the rewards among those investors that are part of the pool.

Summary

Advantages of staking:
- way of generating rewards by long term holders.
- contributing to the security and efficiency of the project you support
- governance say in some cases
Risks:
- often require a lockup or “vesting” period, where your crypto can’t be transferred for a certain period of time
- technical and security issues if you are running a full validator node
- trusting your tokens to someone else if you join a staking pool.
It is important to research the requirements and rules for each project.