What is staking crypto explained in the most detailed way

In less than a decade after going mainstream, the blockchain industry has spawned numerous buzzwords like "Bitcoin halving," "altcoins," "decentralized finance," "non-fungible tokens," and "Web3." They captivated the media's attention and kindled the interest of people with different financial capabilities: from retail investors who could spare only a few hundred dollars a month to buy crypto to real heavyweights that possess the financial power to move the market.  

In 2023, amidst the crypto winter 2.0, people on social media, regulars on crypto forums, and the “suits” on the upper floors of New York skyscrapers are asking the same question: "What is crypto staking? If it really yields high rewards in crypto, how can we jump on that bandwagon?" Before we delve into a detailed explanation, let's get one thing straight: cryptocurrency staking is not a get-rich-quick scheme like NFTs. The true benefit of crypto staking lies in its ability to create earnings even when the market is as red as a firetruck. 

Staking is the only area of the crypto industry where providers like Cryptostake establish a highly secure environment and adhere to a global regulatory framework. They ensure that even the largest investors, with portfolios worth millions upon millions, can be confident that their funds are safe and sound, generating passive income around the clock. What other form of cryptocurrency investing can offer the same blend of guaranteed yields and bulletproof protection? No need to guess since there are none. 

In the following blog post, we are going to give a thorough explanation of what cryptocurrency staking is using comprehensible analogies, dig deep into the technicalities of the process itself and explain how to stake your crypto securely with a trusted provider.  

Similarities between online gaming and crypto staking

The generation of retail investors who grew up inseparable from computers and the Internet are likely to grasp the concept of staking through a comparison with gaming, an industry that has been one of the first to adopt cryptocurrencies and blockchain solutions. Most gamers today are die-hard fans of massively multiplayer online role-playing games (MMORPGs) like World of Warcraft or Guild Wars 2. In these and similar games, players can collect or "farm" in-game currency or valuable resources by completing tasks and quests, defeating foes, or participating in a virtual economy - all to keep the online fantasy world alive and thriving.  

Now, think of staking as a financial game where players have the mission to support the blockchain network by completing tasks - validating transactions and putting their records into blocks, the units of information that form the blockchain itself. In doing so, the participants are 'farming' rewards in tokens, which are then allocated to staker's intra-platform account or a separate crypto wallet, same as the results of farming are credited to an in-game account. In MMORPGs, a group of characters can unite to complete a difficult quest and earn more gold, whereas in staking, small investors who can't meet the threshold (32 ETH or such) can participate is so-called staking pools by committing lessers sums in crypto, and share the rewards for keeping the network up and running. 

Bank deposits and dividends and staking - how do they compare?

For those who are not particularly interested in computer games and cannot relate to them, we will draw a comparison between crypto staking and traditional banking services, such as deposits and dividends. When you make a deposit, you place a certain sum of money into a bank account for a specified period during which the money cannot be withdrawn. The bank uses these funds to maintain reserves, ensure liquidity, process payments, and issue loans. Essentially, just as clients' deposits keep the bank's infrastructure operational, staked cryptocurrencies perform a similar function for their corresponding blockchains.    

In return, bank clients receive interest payments that accrue over time, helping the initial account grow at a determined pace, influenced only by inflation. With crypto, the staker receives rewards in the form of non-utility tokens (this refers to liquid staking) or utility tokens, typically the same cryptocurrency as the one staked on the network (the approach taken by Cryptostake). In this case, the cryptocurrency portfolio is affected not only by inflation, if the underlying cryptocurrency is inflationary, but also by market volatility, which can be unpredictable. If the staked cryptocurrency is deflationary, like ETH, meaning its supply is decreasing over time, then price action remains the sole factor that determines the overall profitability of a given staking strategy. 

To summarize, cryptocurrency staking shares a similar foundation with bank deposits and in-game resource farming, as they all operate on the principle of rewarding contributors for their role in maintaining the stability and functionality of the respective ecosystems. However, this is a very broad generalization, whereas differences will become more evident as we have crypto staking explained to you further.

Proof of stake as the foundation of the crypto staking industry

Like any financial concept, cryptocurrency staking has a foundation - a technological foundation in this case - upon which it has been built. If you have a broad understanding of blockchain technology, you should be aware of the utmost importance of a consensus mechanism. It functions as a protocol or an algorithm that enables multiple network participants (commonly known as 'nodes') to reach a full agreement, hence the protocol type, regarding the validation of transactions and recording data into blocks, thus forming the blockchain. 

PoS and auditing serve the same purpose

The said mechanism not only ensures the integrity and immutability of the ledger that is blockchain, but also serves as a robust protective measure against double-spending, network attacks, and data manipulation, among other challenges that could compromise the system's security and integrity. For the sake of better understanding, let's continue the good tradition of drawing comparisons and analogies. Similar to the consensus mechanism in blockchain, traditional finance has a fundamental concept at its core called 'auditing.' Surely, you have heard of it, especially if you run a business or have issues with a tax man (hopefully not). 

Auditing implies an independent examination of financial records and transactions to verify their accuracy and integrity. While traditional audits are usually conducted by a dorky- or a scary-looking 'suit,' the consensus mechanism in blockchain relies on a specific set of rules for validating transactions and creating blocks. When we say 'network participants,' we don't refer to actual people who argue over this or that transaction (that would look silly and inefficient) but rather to computer nodes or simply computers that interact with each other and compete for the right to add blocks to a blockchain and receive the reward in a corresponding cryptocurrency. Regardless of their form, both these concepts share a common goal - preserving trust and security within their respective ecosystems. Now that we know what proof of stake is conceptually, let’s dig deeper into its technical aspects. 

How PoS, and cryptocurrency staking, work on the example of Ethereum blockchain

At this point, you should already have a good understanding of what staking means in crypto, its general concept  and advantages over other forms of investment in digital currencies. Therefore, now is the right time to delve into the technical details of how proof of stake works and why 'depositing' coins, specifically ETH in this case, is vital for the seamless operation of the blockchain. We have chosen Ethereum as an example since, as already mentioned, it's the powerhouse that will likely determine the future of this sphere, if not the entire blockchain industry.

A validator plays a crucial role in the PoS ecosystem, responsible for upholding network security and transaction integrity. To prevent malicious actions, validators stake their capital in ETH within a smart contract as collateral. Their primary role involves confirming incoming blocks of transaction data and occasionally creating new ones. However, if they engage in fraudulent activities, like proposing multiple conflicting blocks, some or all of their staked ETH can be frozen or seized as a penalty. This setup incentivizes validators to demonstrate trustworthiness, reinforcing the notion that money serves as a guarantor of honesty.

To become a validator in the Ethereum network, an individual must commit a minimum of 32 ETH to the deposit smart contract. Afterward, the user needs to install and run three software components: an execution client, a consensus client, and a validator client.

After setting up all the necessary components, the participant enters an activation queue to regulate the rate at which new validators join the network. They also receive new blocks from their peers. Upon receiving a block, the participant re-executes the transactions within it to confirm their validity and checks the block's signatures. Finally, the user casts a network-wide vote, known as an attestation, in favor of the assigned block.

Contrary to proof of work, where the time of block confirmation is regulated by the mining difficulty, PoS has the system divided into slots (12 seconds) and epochs (32 slots). A random validator is selected as a block proposer in each slot - he bears the responsibility for creating and sharing a new block. Additionally, a committee of validators is randomly chosen in each slot to validate the proposed block in order to effectively manage the workload and timing. This process also helps maintain the network's decentralized nature and ensures that the validator's duty is done properly. 

Diligent network participants who successfully propose and validate blocks and keep staked coins active are rewarded with newly minted ETH, along with transaction fees. To summarize, in order to fulfill the role of an Ethereum blockchain validator and earn rewards in crypto, you need to:

• Have 32 or more ETH as collateral – that will be your stake.
• Run three different pieces of software. The good news is that even a standard laptop can handle this task.
• Ensure that the software remains active and functions properly at all times; otherwise, you may face penalties.
• Fulfill validator responsibilities diligently and avoid any questionable activities.

By doing so, you can become a proud, independent validator who reaps all the rewards when they are available. Remember how we compared staking to gaming and bank deposits? Now, it might not seem as straightforward as depositing money in a bank, right? While the responsibilities and risks of an independent validator are significantly greater than those of an MMORPG gamer, it doesn't mean that cryptocurrency staking has to be overly complicated. What if we told you there's a way to earn passive income with crypto without all the hassle?

Staking pools and custodial staking - the benefits and the drawbacks 

For those who ask: "Where can I stake crypto without the hefty requirement of 32 ETH?" staking pools may seem like a practical solution (at first). Staking pools are collective platforms where individuals pool their digital resources, allowing them to combine their holdings and participate in blockchain validation as a group. This means that even if you have far less than 32 ETH, you can still be part of the staking process and earn rewards in crypto. 

Staking pools are managed by a central entity or a group of individuals who handle the technical aspects of running validators, ensuring that the process runs smoothly. Participants in the pool contribute their tokens and, in return, receive staking rewards based on the amount they've staked, fair and square. 

Some of the most popular staking pools include Ethereum 2.0-focused platforms like Rocket Pool, Lido, and StakeWise. These platforms have more or less user-friendly interfaces, which means that you won't have to wreck your brain over technicalities - everything is 'done in a few clicks' mostly. Thanks to this, users receive an opportunity to commit smaller amounts, thus making staking accessible to a broader range of users.

So, do those pools represent the best way to stake crypto? Regardless of what their ads might say, staking pools have their drawbacks. The most significant one is that users don't have full control over their staked funds and private keys, as they are entrusted to the pool's management. This type of service is called custodial staking. You may have heard the saying, 'Not your keys, not your crypto.' Gives some food for thought, doesn't it?

Additionally, in the case of liquidity pools, where assets are provided to decentralized exchanges, rewards can be paid in non-utility tokens with limited or no real value. All this begs the question: "Is staking crypto safe?" It could be if you opt for a non-custodial staking provider like CryptoStake. 

Staking with CryptoStake - easy, secure, and rewarding 

Finally, we have arrived at the question: "What is the best way to stake crypto?" It is obvious that you should strive to find a trusted service provider that offers good terms and refrains from meddling with your crypto funds. In that regard, CryptoStake stands out as a paragon of user-focused innovation. With a non-custodial approach, which implies that the user controls his private keys and his crypto at all times, CryptoStake offers a host of benefits that set it apart in the bustling crypto landscape.

Let's see what staking on CryptoStake looks like. In the industry where assets are often tokenized to provide liquidity and support DeFi projects, CryptoStake takes a different path. Unlike liquid staking protocols, where users may relinquish control of their native assets and receive liquidity tokens with questionable backing, this provider keeps you in the driver's seat. With CryptoStake, you never compromise control over your valuable crypto assets, which is of the utmost importance for any prudent crypto investor, especially the one with large holdings, the so-called whale. This unparalleled control ensures your crypto remains safe and within reach, with no third-party intermediaries.

For those seeking to become validators on Proof-of-Stake (PoS) networks like Ethereum 2.0, Polkadot, and Cosmos, CryptoStake offers a streamlined experience. With a single click, you can become a validator through CryptoStake's proprietary staking app with a unique ID, which is openly verifiable on CryptoStake's monitoring network as well as many other platforms. This ID allows you to easily check your validator status whenever needed. 

With a robust infrastructure, CryptoStake ensures that validator nodes have a 99.9% uptime rate. The use of three separate data centers further fortifies this resilience, ensuring that your validator node is virtually always operational, constantly contributing to the network, so don't worry about the downtime penalties. 

Moreover, CryptoStake takes pride in developing a solution that streamlines the staking process to the maximum, making it accessible to both newcomers and seasoned crypto enthusiasts. Through the proprietary staking wallet, users can easily stake top PoS cryptocurrencies such as Ethereum, Polkadot, and Cosmos, with plans to add other stakable coins in the near future. 

CryptoStake's registration in Switzerland, known for its stringent crypto regulations and financial integrity, sets a high standard for industry compliance. It even takes an extra step by assisting users with tax statements, a feature seldom found in the crypto space. So, don't worry about the IRS or other authorities getting suspicious about your crypto profits - earning with CryptoStake is fully legit.  

Here is a quick guide on how to stake on cryptostake.com. All you need to do is download and install their proprietary app from Google Play or Apple Store, write down a seed phrase that you'd be given to open an account (keep it in a safe place at all times), choose the PoS coin you'd like to stake, confirm the lock-up of funds and voilà - you are a genuine cryptocurrency validator with a new stream of passive income. Staking doesn't have to be complicated and worrisome - it won't be if you opt for CryptoStake.