Staking is a crucial process where individuals commit their cryptocurrency holdings, known as their “stake,” to reinforce the security and functioning of a blockchain network.
Essentially, stakers play a vital role in safeguarding the chain and validating transactions within the blockchain.
This method of staking is specifically applicable to blockchains utilizing a proof-of-stake (PoS) consensus mechanism, as observed in platforms like Ethereum and Cardano.
Unlike the proof-of-work (PoW) system utilized by cryptocurrencies such as Bitcoin, which relies on computing power for transaction validation, PoS offers an alternative approach.
By staking their coins, users reduce the liquidity of their holdings, as the coins become tied up in the staking process.
While staked coins can usually be accessed, they may only be used for other purposes once they are no longer staked.
The PoS algorithm employs a pseudo-random selection process to choose validators from a pool of nodes.
This selection considers factors like stake age, randomization, and node wealth.
Each PoS cryptocurrency employs its own set of rules and methods, aiming to create an optimal combination for the network and its users.
Unlike PoW, PoS allows for block production without the need for specialized mining hardware, such as ASICs. Instead, staking requires an investment in the cryptocurrency itself.
When a node is chosen to forge the next block, it verifies the transactions’ validity, signs the block, and adds it to the blockchain.
As a reward, the node receives transaction fees and, in some cases, a coin reward.
Nodes can cease being forgers, and their stake and earned rewards are released after a specific period, enabling the network to verify the absence of fraudulent blocks added by the node.
Many argue that the staking-based block production contributes to increased blockchain scalability.
This is one of the primary reasons behind Ethereum’s transition from PoW to PoS, known as ETH 2.0, involving a series of technical upgrades to the network.