What is staking?

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Staking is a way of earning extra cryptocurrency by helping to verify cryptocurrency transactions. You can stake cryptocurrency in projects that use a proof of stake consensus mechanism to process transactions, such as Ethereum or Cardano.

Proof of stake consensus mechanisms require people to actively put their cryptocurrency to work in helping to secure the cryptocurrency network. In order to be able to verify transactions and get rewards, you have to have put up a certain amount of cryptocurrency before you can take part. 

This effectively acts as a deposit to ensure you are validating the right transactions. If you do it right, you get a reward.  If you validate flawed or fraudulent data, you may lose some of your stake as a penalty. 

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What are validators? 
Which cryptocurrencies use proof of stake? 
How can I stake cryptocurrency? 
What happens to staked coins? 

What are validators? 

Every cryptocurrency has a database that stores transactions. In the vast majority of cases, this is known as a blockchain. A blockchain must safely and chronologically keep track of and record all transactions made using the cryptocurrency. This can only happen when network participants agree that each block of transactions is valid. 

When you stake cryptocurrency, you become what is known as a validator. To qualify as a validator on a cryptocurrency network that uses proof of stake, validators must lock up, or stake, a certain amount of cryptocurrency as collateral. 

If a validator tries any funny business, such as pushing through a bogus transaction, the network can penalise them by destroying their stake. This is also known as “slashing”, though there are other ways in which networks can penalise rogue validators. Effectively, what this does is disincentivise participants from breaking the rules and awards them for their work in approving good transactions – ensuring that the integrity of the blockchain remains secure. 

This is different to what happens when a cryptocurrency uses a proof of work consensus mechanism, such as Bitcoin. In a PoW blockchain, the parties that approve transactions are known as miners rather than validators. Miners compete to solve complex mathematical problems in order to validate transactions and create new blocks, which is done mostly through a blunt force method that involves using computational power to be the first to solve it. This still requires a significant amount of resources and rewards, but is much harder for the average person to set up.

Which cryptocurrencies use proof of stake? 

The short answer is many of them. Proof of stake is the second-most used method to reach consensus on a cryptocurrency network. 

Some of the better known cryptocurrencies available on Luno that use POS are:

How can I stake cryptocurrency? 

Each cryptocurrency network sets a minimum amount to qualify as a validator. Ethereum’s current minimum is 32 Ether, about $40,000 at current prices. Seeing that not many people have this kind of money, some cryptocurrency platforms offer staking pools, in which they pool customer funds and stake crypto on their behalf. As a reward, customers earn interest on the amount staked. 

What happens to staked coins? 

Staked coins are held in a special kind of wallet that helps secure and validate transactions in a cryptocurrency network. You can stake coins individually or participate using staking pools, where many people combine coins to have a bigger impact on the network, and earn more rewards. In most cases, staked coins are “locked up” for a set period of time that was agreed on beforehand. This means they are not available for use or transfer until the person decides to unstake them or at the end of the pre-agreed time period.

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