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With the rise of Proof of Stake (PoS) consensus mechanisms, blockchain technology has evolved to offer users new opportunities to participate in network security while earning rewards. The transition from Proof of Work (PoW) to PoS represents one of the most significant architectural changes in blockchain history, bringing benefits like stronger settlement finality, improved scalability, and drastically reduced energy consumption.
In this article, we'll explore the fundamentals of blockchain staking, provide an overview of the various ways users can stake their tokens, and highlight each option's benefits and drawbacks. Before diving into the details, let's start by understanding what staking really means.
Staking Overview
At a high level, permissionless systems like blockchain networks require a mechanism by which all system participants (i.e., nodes on the network) reach agreement on a single source of truth. In modern blockchain networks, consensus about the state of the blockchain is achieved through validators who participate in Proof of Stake.
This change confers many benefits to blockchain networks, including stronger settlement finality guarantees, the enablement of advanced scaling solutions like sharding, and drastically reduced token issuance and energy consumption. From a user's perspective, this change presents a new opportunity for financial gain in the form of staking rewards.
Network Security
Staking helps secure the network by creating economic incentives for honest behavior
Earn Rewards
Validators earn financial rewards for proposing and validating blocks
Lower Energy
PoS drastically reduces energy consumption compared to PoW mining
Staking involves depositing, or "locking up", tokens to activate validator software, which effectively adds another validator (i.e., node) to the blockchain network. Validators help the network reach consensus by proposing new blocks, or verifying and attesting to the validity of blocks proposed by others. As more honest validators participate in the network, the cost of attacking the network increases, thereby improving the blockchain's economic security.
Users remain incentivized to stake their tokens and activate a validator since validators earn financial rewards for carrying out their assigned duties—proposing and validating blocks. These rewards come from new token issuance and transaction fees. Rewards are proportional to validator uptime, meaning that a validator that's always kept online and performing its duties will earn maximal rewards.
Types of Blockchain Staking
Those who stake their tokens tend to do so via one of four primary routes:
Solo Staking
Solo staking allows you to earn the maximum rewards possible on the tokens that you stake, eliminating any rent-seeking intermediaries and providing you with complete control over your funds and validator setup at all times. However, solo staking requires a minimum amount of tokens, greater technical proficiency, and generally more effort than other forms of staking.
Solo staking means running a blockchain node independently, which involves:
- •Purchasing and maintaining hardware
- •Running and periodically upgrading client software
- •Generating and securely storing validator keys
- •Maintaining a fast and reliable internet connection
- •Staying aware of network upgrades and updates
Note: While solo stakers reap the highest possible rewards on their staked tokens and avoid substantial counterparty risk by self-custodying their funds and keys, they do assume the risks of key management, as well as technical and operational risks.
Staking as a Service (SaaS)
For users who have enough tokens to fund a full validator, but lack the technical know-how, time, or desire to operate a node independently, staking-as-a-service may be a particularly attractive option. In this arrangement, a staking provider typically supports users through the process of depositing tokens and generating their validator keys.
The provider operates validator hardware and software on the user's behalf, and uses their signing keys to perform the validator's on-chain duties like block proposals and attestations. Typically, staking providers charge a recurring fee for this service, often taken as a percent of the rewards earned by each validator.
Compared to solo stakers, those who stake with a provider personally assume much less technical and operational responsibility for their validator. However, shifting this responsibility to a provider does expose these users to greater third-party technical and operational risks.
Pooled Staking
Staking pools lower both the financial and technical barriers to entry for staking. They provide a simple way for users who hold less than the minimum validator amount to combine their deposits with others, collectively fund a new validator, and earn staking rewards in proportion to their deposit.
From the user's perspective, this makes staking as simple as signing a single transaction. The simplicity and convenience that staking pools offer has made them an immensely popular option amongst users.
While most pooling solutions are implemented on-chain via smart contracts that accept, pool, and disburse user deposits, the technical complexity of operating validator hardware and software is outsourced to the pool's validator set—typically composed of multiple, independent validator operators.
Liquid Staking Pools
A popular subset of staking pools offer "liquid staking", which provides pool depositors with a token that represents their staking position. These liquid staking derivatives (LSDs) provide liquidity on staked positions and can be used across DeFi as collateral assets, allowing holders to earn additional yield on top of staking rewards.
Centralized Exchange Staking
Many centralized cryptocurrency exchanges offer staking services, allowing users to stake their tokens directly through the exchange platform. This option provides maximum convenience and accessibility, with no technical knowledge required and often no minimum deposit amount.
However, users must trust the exchange to custody their tokens, handle staking operations securely, and distribute rewards fairly. This option carries counterparty risk and often provides lower rewards than other staking methods due to the fees charged by the exchange.
Get Started with Blockchain Staking
Understanding the different staking options available is crucial to making informed decisions about participating in blockchain networks. Whether you choose solo staking for maximum control and rewards, delegate to a service provider for convenience, or join a staking pool for accessibility, each approach offers unique benefits tailored to different needs and expertise levels.
As blockchain technology continues to evolve, staking will play an increasingly important role in network security and user participation. By understanding these fundamentals, you're better equipped to participate in the future of decentralized finance.