What is Staking?

It’s helpful to think of staking as similar to putting your tokens in a savings account or as depositing them with a third party. On a technical level, when you stake a crypto-asset, you are generally committing that asset to be controlled by a smart contract in exchange for something, usually an alternative token of some kind.

 

Staking is used in a very wide variety of contexts. Let’s take a look at some of the most common.

 

1.Staking and Liquidity Pools (DeFi, gaming)

 

One of the significant innovations of Decentralized Finance, or DeFi, has been the liquidity pool. In order to exchange one token for another without relying on a trusted intermediary such as a centralized exchange, users deposit matching amounts of two different tokens–say, ETH and DAI–into a pool controlled by a smart contract; other users can then use that pool of tokens (hence, a liquidity pool) to trade ETH for DAI, or vice versa. Those who deposited tokens into the pool earn a percentage of a transaction fee for the use of their tokens.

 

2.Staking Native Tokens in a validator node

 

Many blockchains used consensus mechanisms like Proof of Stake (POS), where block validators are selected based on the number of coins they are staking. In this case, the term staking refers to the act of validators committing funds to the system. So validators can only participate in the process of producing new blocks if they lock their coins.

 

The locked funds will then act as collateral, meaning that malicious validators will most likely lose their stake and be kicked out of the network. On the other hand, honest validators will be rewarded as new blocks are produced (forged). Thus, a PoS blockchain achieves distributed consensus according to the economic stake that validators commit to the network.