How Crypto Staking Works
Welcome back, everyone! Last time we talked about the process behind how cryptocurrencies are mined and the role that miners play in contributing to the blockchain. Today we are going to talk about staking cryptocurrencies and how specific networks utilize staking in their system.
Before we get started though, it’s important to note that the way that cryptocurrencies generate new coins varies from currency to currency. Different coins do different things and usually have to choose between either mining or staking to generate new coins. Networks like Bitcoin utilize mining while networks like Etherium utilize staking.
Now let’s continue with the same problem we had last time. Let’s say Leonard still wanted to send his friend some crypto but this time in Ethereum. Leonard would still need to announce his wallet address, his friend’s wallet address, and the amount of Ethereum he wants to send but there would still be the problem of who’s block does the system chooses to record the transaction on the blockchain. None of the blocks are particularly wrong but not all of them have the same transaction order but one person still has to be picked to continue the ledger.
Let’s say ten people want to volunteer as validators on the Ethereum network and add their block to the Ethereum blockchain. These ten volunteers would have to put down a specific amount of coins upfront as collateral before they can be chosen to be validators. Once the volunteers stake their coins, rather than having the miners race to solve hash problems, the system will randomly select one person out of the ten to
submit their block to be added to the ledger. In return, the validator is compensated with more Ethereum.
It’s also worth mentioning that to add an extra layer of security for the network, extra assurances were put in place to protect the network from cheaters. If someone tries to cheat the system by either giving themselves free coins or recording a false transaction, the system will take away the coins that the cheater has staked and the cheater will usually be kicked from the network. Additionally, if a person is chosen but encounters an error while adding his block (lost wifi connection, loses power, etc.) he might have some or all of his coins slashed. Although it seems unfair, these measures were all implemented to encourage a network of reliable validators for its users.
The core concept behind staking was designed to be fairer and energy-efficient than other methods like mining. In order to mine coins like Bitcoin, someone would have to spend thousands on computer parts and use a significant amount of energy running algorithms to solve these hash problems and “win the race”. However, rather than having thousands of people all wasting their time and resources only for one person to be rewarded, staking systems, like the one that Ethereum utilizes, chooses one person at random to add their block to the blockchain, eliminating the need for all ten people to waste their resources which is more cost-effective and energy-efficient.
Ultimately, all anyone needs to stake crypto is a solid computer and an internet connection. There is no need to spend thousands on a mining rig that doesn’t even guarantee a reward. Anyone can grab an old laptop and start staking and as soon as the system selects you you’re in business. However, the advantages that staking provides in terms of energy efficiency are undeniable, especially considering that conserving the environment will be one of humanity’s main focuses for the next few decades. Blockchain has come so far but is just getting started, staking will be a big part of what’s to come.