The same way banks need your money to survive (economic security) and if everybody decided to withdraw their money at the same time, they would collapse, that’s how some blockchains (proof of stake blockchains) need people to deposit money for security. The goal is for participants to have a stake in the network so they can be incentivised to keep the integrity of the blockchain. If you have a stake on the blockchain, you can get rewarded and contribute to the growth of the blockchain.

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What Is Staking?

Staking is the process of locking up your cryptocurrency in a blockchain network to help secure and operate it. In return, you earn rewards. It’s similar to keeping some money in your savings account and earning interest on it but this time, you own a part of the bank (blockchain) and your money helps keep the bank (blockchain) safe. There are three main ways you can stake. Direct Staking: You can run your own validator (the computer that runs transactions for everyone on the blockchain) and stake directly to the blockchain. Delegated staking: You “delegate” your tokens to someone else’s validator, and they handle the heavy lifting for you. You still get rewards, minus a small fee. Like investing in a friend’s bakery and sharing the profits. Direct and Delegated staking are forms of native staking. Liquid Staking: When you stake, your tokens are locked up and you can’t use them, with liquid staking, you get a special token in return that represents your staked position. You can trade, lend, or use this token in DeFi while still earning staking rewards in the background.

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How Staking Works

You’ll deposit your money into the blockchain through a validator and you automatically become part of the security system that keeps everything running smoothly. In return for your tokens, you earn rewards (kind of like interest, but often higher than what your bank gives and paid out in the same coin). The more tokens a validator stakes, the higher the chance of being chosen to validate the next block and get rewarded. Once your tokens are staked, they’re usually locked up for a certain period (called an unbonding period, usually one epoch (like a day onchain) if you want to withdraw them. This lock-up time makes sure that everybody stay honest. If anybody tries to misbehave or attack the network, part or sometimes all their staked tokens can be slashed (basically burned or taken away). Staking is a great, more secure way to bring in passive income while contributing to your favourite blockchain network. The great part is that you are in control and no one can freeze your tokens or tell you when to withdraw.