Staking, an often unknown crypto-feature
Cryptocurrencies can be a source of active interest like any form of capital.
Of course, the mechanisms are different. For now they are not paid by the banks, but by staking, a functionality unknown to the majority of investors, who are most often only interested or aware of the price trend.
But what is staking? And here we need to take not one step back, but two.
First step back. Cryptocurrencies are mostly based on decentralized blockchains which, in turn, base their functioning on agreement mechanisms (called consensus) between the blockchain managers, the so-called nodes. Consensus is the agreement between the majority of nodes on the validity of a block of transactions. The validation of transactions has a cost for those who request it and therefore a compensation for those who carry it out. Therefore, validation is a profitable activity in node management.
Second step back. There are mainly two consensus management mechanisms. Proof of Work (PoW) where consensus is reached with the agreement of 51% of the nodes, regardless of their weight in the blockchain. It is the most “secure” mechanism and is used by the most famous blockchain, that of Bitcoin, based on around 10,000 nodes. So, in PoW, one is worth one, as in elections in democratic systems.
The other most used mechanism is Proof of Stake (PoS) in which consensus is reached not on the majority of nodes, but on the majority of the value managed by the individual nodes. In other words, those who manage a greater value are worth and, if we can say, vote, in proportion. As in company shareholders’ meetings. It is obvious that, in this way, whoever manages the nodes (especially the more structured ones) has an interest in associating, or even renting, further value to increase their weight in the formation of consensus. The Ethereum blockchain has been operating on a PoS basis since 2022. It is clearly less secure than PoW because in principle the larger nodes could join together to carry out maneuvers to their advantage. This is how mining pools were born. And this is where staking comes into play, which can be seen as the compensation for renting your cryptocurrencies to mining pools.
Staking interest rates are attractive. They range from a stellar 22% on the Cosmos crypto to a more normal 5-7% on Solana and Eth. Be careful, however, as there may be some caveats relating to the time constraint, for example, one year after which the values contributed in staking are blocked and cannot be released to the holder.
Therefore, staking can only be carried out with Proof of Stake blockchains and not with Proof of Work ones. This explains why staking is not possible on Bitcoin, which, as mentioned, uses PoW.