Staking: Basics

Staking is the action of locking a number of native tokens of a specific blockchain to participate in the block confirmation process of the network, also known as consensus. This methodology is called Proof-of-Stake(PoS) and was developed partially to combat the excessive use of electricity required by the traditional Proof-of-work(PoW) consensus mechanisms. There is a heated debate in the media over the power usage of Bitcoin and Ethereum, and the majority of current and future projects (including ETH2.0) will not be using PoW in the future. Additional benefits of using PoS are improved transaction speed and in some cases almost unlimited scalability.

From an investment perspective, staking is one of the main ways to earn with crypto, without actively participating in trading. Other non-trading methods include providing liquidity, lending, and in some cases just HODLing a coin.  

How does staking work?

In layman's terms a Proof-of-stake blockchain validates transactions (in blocks) by reaching consensus between the majority of people who have staked some tokens. These people or pools of people are called "Validators". Being a validator allows people to earn a fee from the block confirmations in a very similar fashion to the PoW without the requirement of computation power. Essentially, the Validators guarantee there is no fraud in the transactions signed by them by leaving some of their own money as a guarantee. Some blockchains offer additional benefits to Validators, such as voting rights and participation in exclusive investment opportunities on their platform (ITO, STO, ICO).

To start staking one will be required to have a reasonable amount of tokens (native to the blockchain) to show commitment to the network. Most staking platforms would present you with a number of available tokens to stake, where locking periods will offer different yields, measured in APY(Annual percentage yield).

IMPORTANT NOTE! Usually, the displayed APY is on an annual basis and might include compounding, so the actual profit for the period has to be recalculated, unless the platform has an integrated yield calculator.

Why are the staking rewards changing?

There are multiple factors that can affect your staking rewards over time. Depending on the blockchain they might include the total number of stakers, the total amount of currency staked on the network or even changes in the network protocol itself. Most staking platforms would provide a rough estimate of what you will earn based on a past performance, but do read their FAQs for more details, as some specifics may vary.