What is cryptocurrency staking?

What is cryptocurrency staking? How does it work? What are the benefits of staking cryptocurrency? Get a quick rundown of everything you need to know about staking in this article.

The simplest explanation of staking is that you store your crypto to receive rewards in the form of more crypto. You receive rewards because you are contributing to keeping the blockchain running. In other words, you are participating in the blockchain ecosystem.

Not all cryptocurrencies can be staked, but some of the most popular are Ethereum (ETH), Cardano (ADA), Solana (SOL) and Polkadot (DOT). What do all of these have in common? Well, they are what are known as proof-of-stake blockchains. These are blockchains that are secured and operated by participants staking their cryptocurrency.

In many ways, this system is similar to depositing money in the bank to earn interest, in the way that you store crypto in the network to earn rewards. However, these two systems are fundamentally different from each other. To understand the difference, we first need to look at how a blockchain, more accurately a proof of stake blockchain, works.

How a proof-of-stake blockchain works

In simple terms, a blockchain can be understood as a digital ledger that records information about transactions and who owns what on a digital network. This is stored online in a decentralized manner, meaning that the storage of the ledger is spread across a network of participants. Instead of there being one copy of the ledger stored in one place, all participants each have their own copy of the same identical ledger, and only when they agree that the content is correct will the information be valid.

Blockchains are made up of blocks, and in order to create a new block, the blockchain needs your help. This is because blockchains are decentralized, meaning that they are not controlled by a central entity, such as the government. The blockchain is controlled by you and me - that is, we who choose to participate in building blocks. Some blockchains are what are called proof-of-stake blockchains, where blocks are built by participants staking, or locking, their crypto.

Firi explains: What's the difference between proof-of-work and proof-of-stake?

Both proof-of-work and proof-of-stake are consensus mechanisms that different cryptocurrencies use to verify transactions. You could also say that they are different mechanisms for securing a blockchain. For example, PoW and PoS both ensure that only one person can use one coin at a time.

Proof-of-work is one of the most common consensus mechanisms in cryptocurrency, and is used by Bitcoin. In short, miners must solve a mathematical problem to verify the validity of a block. The first computer to solve the problem is allocated the next block and receives a "block reward" such as bitcoins, and the process begins again.

Mining uses computing power to process transactions, secure the network and keep all systems synchronized with each other.

Miners secure the network by making it cost an attacker enormous resources to manipulate or destroy the network. It then becomes virtually impossible to carry out a successful attack because you need to control enough computing power to overpower the network - but this in turn will cost more money and resources than you would potentially gain from a successful attack.

Proof-of-stake is also a common consensus mechanism, but instead of solving a mathematical problem, users have to stake some of their crypto to validate a block.

Staking works by storing your cryptocurrency on the blockchain, in what are called staking pools, in exchange for earning rewards. Validators, as they are called, offer their crypto as collateral for the opportunity to validate blocks. Who is chosen to validate the block, and thus receive a reward, is drawn based on who has locked the most crypto for the longest time in the staking pool. The blocks are validated by several different validators, and when a specific number of validators have verified the block, the verification is complete. Staking is often compared to having a high-interest savings account where you set aside a certain amount of money and receive a return similar to interest.

If a validator attempts to attack the network it will be penalized by losing a percentage of its crypto holdings. Therefore, the only rational thing to do is to make decisions that are also in the best interest of the network as a whole.

Similarities and differences between PoW and PoS

Both consensus mechanisms have financial consequences as punishment for trying to manipulate or attack the network. For miners (proof-of-work), the penalty is that you spend a lot of computing power, energy and time, which costs money. For validators (proof-of-stake), it is the cryptocurrency that you have staked that is at risk.

A significant difference between the two consensus mechanisms is energy consumption. Proof-of-stake is claimed to be 99.95% less energy demanding than proof-of-work because no computing power is needed.

How cryptocurrency staking works

Staking is when you store, and sometimes lock, your cryptocurrency on the blockchain in exchange for earning a reward. But why does storing your coins on the blockchain help the blockchain? Well, because by holding coins, you have an incentive to make choices that are in the best interest of the blockchain.

For example: Attacking the network would be irrational because the network would be worth less and so would your locked coins. Actions that could damage the network could also lead to "slashing", which means that you will be deprived of a certain proportion of your locked coins. Therefore, the only rational thing to do is to make decisions that are also in the best interest of the network as a whole. This is how the network trusts all those who are selected to secure the platform.

Not everyone who locks their cryptocurrency gets to participate in validating transactions and thus receive rewards. You are actually in a competition to win the opportunity to do this. Two important factors that contribute to an increased chance of winning the competition are:

How much crypto you stake.
How long you have been staking.

Still, in order to be somewhat fair to people who don't have a lot of money to spare, the blockchain has decided that some randomness must also play a role in the chances of winning. Thus, it makes sense for everyone, no matter how many or few coins they stack, to participate in securing the network.

The one that wins the competition and further validates transactions is called a validator. It takes several validators to validate the same block, and when all validators agree that the block is correctly constructed, the process is complete.

How to stake cryptocurrency?

Although staking is often compared to putting money in the bank, until now it has not been as simple of a process.

Each cryptocurrency has its own rules around staking, different rewards and different requirements to join a stake. Ethereum, for example, basically requires you to have 32 ETH to become a validator. This is around NOK 500,000 at today's rates.

Fortunately, Firi makes it simple and allows you to stake any amount securely and super easy, without having to bet a whole year's salary to join the fun.

We'll take care of all the complexities and intricacies of staking, so you can sit back and watch your crypto grow.

Start your staking journey in the Firi app!

Pros and cons of staking crypto

Benefits of staking crypto

You can make money while you sleep. The crypto is working for you, and all you need to do to get rewarded is store your crypto over a period of time.
Staking is more energy-friendly than mining. It can also be cheaper to get started, as you don't need computer equipment.
By staking, you participate in the blockchain ecosystem. Some blockchains also give you "voting rights" if you participate in staking, which means you can help decide what happens to the network in the future.

Disadvantages of staking cryptocurrency

You sometimes have to lock your cryptocurrency for a certain amount of time. Some cryptocurrencies are not locked at all, some for a short time, while others are locked for a longer period.
Crypto is highly volatile. Large price fluctuations can lead to both gains and losses. If you stake a currency that goes down in value, the reward may not be as big as you hoped.
Some blockchains require you to stake a minimum amount that is quite large.
Staking crypto is never free, and you'll often have to pay a small fee to the platform or crypto exchange you're staking with.

What are the risks of staking cryptocurrency?

When you stake crypto, you also have to accept that your funds may be locked for a period of time. During this period, you may find yourself in a situation where you would like to withdraw or sell your cryptocurrency. This may not be possible if you have committed to staking.

At Firi, we offer you staking without locking your crypto.

Ofte stilte spørsmål om staking

Which cryptocurrencies can be staked?

There are many cryptocurrencies that can be staked. Here are some of them:

Ethereum became a proof-of-stake blockchain in September 2022, so now ETH can be staked. Ethereum, launched in 2015, is the world's second largest cryptocurrency based on market capitalization. Ethereum's associated cryptocurrency is called ether (ETH).

Cardano's cryptocurrency ADA can also be staked. The blockchain project Cardano was founded to "create a more balanced and sustainable ecosystem" for cryptocurrencies.

Solana is a decentralized blockchain that is programmable. This means that smart contracts and decentralized apps can be built on the blockchain, making Solana one of Ethereum's clear challengers.

Polkadot's crypto DOT can also be staked. Polkadot is built as part of a larger vision of a decentralized internet. Polkadot wants to unite large and unique networks, such as Bitcoin and Ethereum, so that they can collaborate across blockchains

Why can't all cryptocurrencies be staked?

Bitcoin, for example, does not allow staking. This is because Bitcoin is not a proof-of-stake blockchain, as Ethereum is, for example. Bitcoin relies on proof-of-work to verify transactions, and therefore does not need participants to stake crypto.

Which cryptocurrency is best to stake?

Our advice is that you do your own research and choose which coin to stake based on that. Only choose projects that you believe in. Consider these three factors when doing your research:

The value and stability of the crypto.

In general, it is good to choose coins that are relatively stable. That is, crypto that has a high market value, a good reputation and is held by many different investors.

How many coins (will) exist?

If the number of coins is predetermined, scarcity and increasing demand can affect the value of the crypto.

What are the uses of the project and the crypto?

If a project can show real use cases and has utility, there is a greater likelihood of higher demand.

Do you make money from staking crypto?

Yes. Staking is a good way to use crypto to earn passive income. How much you can earn depends on how much you stake and how long you stake the crypto.

Here's a very simplified example of what this might look like:

You stake NOK 10,000 in ETH with APY* of 5 percent.

This means that you will earn NOK 500 annually in rewards. Perhaps you are also staking the reward, which means that you will also earn rewards on the reward.

*APY means annual percentage yield

Can you lose money by staking cryptocurrency?

You cannot lose money on the actual staking, but there is a risk that the crypto you stake will fall in value. As with any other investment in crypto, there is therefore a risk of losing money when you stack crypto. We recommend that you never stack cryptocurrency that you cannot afford to lose.

Linda Helén Skuggen03/11/2022