Staking Made Easy

A Blockchain (or block chain) is a method of storing a list of entries, which cannot be changed easily after they are created. This also applies to the list. This is done by using several concepts from cryptography, including digital signatures and hash functions. In very basic terms, a blockchain combines the following two ideas:

1. Given some data, it is easy to calculate a checksum over the data. Special hash functions can be designed to calculate this checksum. These functions can be designed to return a value that always has the same length, which is not dependent on the length of the input. This value is called hash value, or message digest. The functions also have another property: Given the same input, they must return the same output (hash value/message digest).

2. In addition to the hash values, a block typically also contains a timestamp, and some payload. Each block uses a digital signature, which allows detecting any change in the data since the signature was made. When new blocks of data are created, the newly created block will also contain the hash value of the previous block.

There are several algorithms out there that have ways to generate new blocks in a blockchain.

Bitcoin for example uses something called a "Proof of Work" (PoW) block generation mechanic, requiring mathematical calculations by very specialized computers, called Miners. They literally use mathematics to draw out a set of numbers and "mine" those field of numbers until one matches the criteria to become the next block. The newly found block is then broadcasted out to a community of Miners to be confirmed and to reach a consensus about the legitimacy of newly minted blocks. All miners running legitimate software will then work together to support one another in these block confirmations.

Another popular method to generate new blocks is something called "Proof-of-Stake" (of PoS). There are several flavors of PoS. In general it's another type of consensus algorithmic where the next block is chosen by a candidate that has a stake placed into the same network that they run PoS for and extend the blockchain through a simpler algorithm that does not require heavy computation. The new block proposers are rotated amongst a community of proposers, called Validators, to propose new blocks, and also validate blocks proposed by their peer validators.

The role of validators is to run a full-node and participate in consensus by broadcasting votes which contain cryptographic signatures signed by their private key. Validators commit new blocks in the blockchain and receive revenue in exchange for their work. They must also participate in governance by voting on proposals. Validators are weighted according to their total stake.

Staking is available with Proof-of-Stake blockchains that have an incentive structure for delegating the tokens to blockchain nodes, specifically for which are hosted by Validators. This model is called Delegated Proof-of-Stake. Delegating tokens to Validators encourages node operators to run legitimate code that supports the PoS blockchain creating an entire community of Validator node operators.

The delegated tokens are paid "interest" when they're staked with a Validator node. Long-term blockchain believers are incentivized to hold their tokens even longer and to help them with this, they can “stake” their coins in support of the Proof-of-Stake (PoS) network and receive rewards in return.

PoS Blockchains, like any other blockchains, have an incentive system built in as part of its token economy. Speculators trade cryptocurrency tokens in hopes of making a quick profit. Stakers are long term token holders that would stake actual financial interests into a blockchain initiative as a belief in a blockchain, in order to run the blockchain properly by enabling Validators to run servers that will support the PoS network. In return, the blockchain algorithm will provide stakers with rewards when new blocks are proposed and transactions signed; both which also strengthens a blockchain.

The rewards are produced by proposing new blocks and proving the other Validator’s newly proposed blocks. These are done through algorithmic proof by a collective set of Stakers though a number of Validators which operate servers that run blockchain’s code. When Stakers place their tokens with trusted “Validators”, who run staking operations, they enable blockchains to be extended through the proposal process. And these actions actually producing new tokens through a pre-determined supply of tokens coded into the blockchain code.

Staking is a way to earn extra rewards or return, similar to that of receiving interest payments, on your holding of tokens/cryptocurrencies. It’s your choice. The longer you hold a cryptocurrency token without staking, the more you lose out. While others are earning rewards over time, you stand to lose out on rewards (like interest payments) that others receive while you don’t. Reward for staking can be attractive as the number of coins increases while the price of the coin may grow at the same time.

You are always in control of your tokens and never do transfer your token ownership to anyone else. Token staking is merely “delegating” the responsibility of blockchain proposals / expansions to a Validator. The ownership of the token remains with the wallet owner’s possession. The risk is that if a token holder stakes with a Validator that doesn’t operate according to the token’s algorithmic service levels (e.g. goes out of service, it’s key is compromised by bad actors, etc.) then there’s a risk of losing a small fraction of your tokens over time via “slashing” rules as imposed by a blockchain governance policies. There’s also another risk of a Validator being compromised or being dysfunctional. This causes your tokens to be slashed in a fraction of a percentage as the Validator is kicked out of being an active participant. But there are still ways to re-delegate out to another active Validator easily.