Staking
Staking assets is generally seen as a long-term hold signal that increases confidence in the asset - after all, if you plan to hold, why not stake and generate passive income?
Staking is a process in which digital assets are locked and generate some interest in return, providing a benefit to long-term holders.
There are two things common to staking most assets:
Staked assets can’t be sold while staked
Staked assets passively generate additional assets while staked
Beyond this, the specifics depend on the underlying digital asset and the staking service. Be careful, the truth is that there are no free desserts. When a service can’t explain how they’re generating interest in a simple manner with on-chain proof, there’s a real possibility they’re running a scam that will eventually run dry.
There are plenty of malicious actors out there trying to steal digital assets wherever they can. A service that is promising a higher %APR than competitors in return for staking your cryptocurrencies with them is one sure sign of such.
A number of cryptocurrencies and NFTs offer some form of ‘staking,’ with the exact process and rewards given depending on the underlying digital asset. Generally, however, the process of staking refers to the ‘Proof of Stake’ consensus method, such as that used by the Ethereum blockchain network.
Proof Of Stake - The Consensus Method (Ethereum)
A consensus method is how a blockchain is secured.
In the Proof of Stake consensus method used by Ethereum, anyone can choose to aid in securing the network by staking. If you have 32 ETH, you can maximize the rewards by running a Validator.
Validators are bundles of hardware and software that process transactions that happen on the Ethereum network. To activate validators solo, 32 ETH must be put up as collateral. They can be set up manually, with the staker handling everything including software and hardware, or services can be used to simplify it for a small fee.
Important note: At this time, unstaking ETH is not possible. Current estimations for the implementation of unstaking range from mid-2023 to mid-2024. I recommend only staking ETH if you plan to leave it undisturbed for a multi-year period.
Validators that perform well with 100% uptime are given rewards in ETH, creating an incentive to secure the network. This reward is paid out of the gas fees charged in transactions on the Ethereum network - when the network gets busier, the rewards get higher.
If, on the other hand, Validators attempt to compromise the security of the network or see consistent downtime, the ETH being held as collateral is ‘slashed’ - reduced by an amount proportional to the misdeed or downtime. Generally, slashing only happens with malicious behaviors or significant downtime (over 50%).
For most people, solo staking with 32 ETH is out of reach. The solution to this is using a staking pool - multiple people gathering together to stake, then splitting the rewards.
There are a number of services available to join staking pools, though doing your diligence and diversifying among multiple services is always recommended.
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