Crypto staking is available with cryptocurrencies or blockchain networks that utilise the Proof-of-Stake model or system. You might sometimes see the model being referred to as the consensus mechanism or consensus algorithm. This is because the computers or people running a crypto network must collectively agree on which transactions should be validated and verified. Only with consensus is a set of transactions recorded to the blockchain ledger.
Proof-of-stake blockchains were developed as an alternative model to the Proof-of-Work model originally used by Bitcoin. The Proof-of-Work model requires the use of specialised mining devices that use intensive computing power to solve highly complex mathematical equations. This then requires participants or miners to operate sophisticated and expensive equipment that cost a lot of money to maintain. Proof-of-Stake does away with these crypto mining rigs so that people can participate in the network’s maintenance simply by committing their digital assets.
Staking rewards
As we discussed earlier in how staking works, by committing funds in the shape of crypto, digital assets, or tokens, network participants – called stakers, nodes or validators – must work honestly in the network, validating and verifying transactions correctly, while rejecting malicious or invalid transactions.
Validators risk losing their stake if they were to behave dishonestly. For instance, by accepting malicious or invalid transactions, these dishonest validators would be found out by other honest stakers, and they would lose their rewards. In extreme cases, they could even be disqualified from future rewards or forfeit their stakes.
In return for this committed stakes, stakers typically receive a certain amount of reward in the same crypto that they have staked. Every network has a different process to determine what this reward entails.
Typically, there is a fixed amount of reward for every time a Validator is chosen to validate transactions. When this happens, the validator actually records them as a new set of transaction into the ledger (or the blockchain), generating or “finding” a new “block” to be added to the blockchain. As such, this reward is usually referred to as a block reward.
In addition, the selected Validator also gets to keep any transaction fees or miner fees paid by those submitting transactions to the network. In the case of Ethereum, there are also miner “tips” included in the rewards.
Calculating staking rewards
In the Proof-of-Stake model, the chance of a staker getting a staking reward is estimated to be proportional to their stake’s share in the entire total of staked assets in the network. The bigger the staker’s share, the bigger the estimated reward.
Example:
Ali decides to stake 1 ACoin into the ACoin
Proof-of-Stake network. The total staked funds in
the ACoin network is now 10 ACoin. This means that
Ali’s stake is worth 10% (1/10) of the staked funds.
Ali should expect an approximate 10% chance of getting
selected to be a Validator for every block.Winning staking rewards can be like a lottery
Remember the part when we discussed how staking could be viewed as playing the lottery?
Recall that the crypto network chooses randomly who among the stakers will become validators, thus earning the reward for validating and creating a new entry into the blockchain ledger. Technically, they are adding another block containing all the validated transactions to the existing blockchain.
It is important to point out that this entire sum of staked coins consists of many other stakes from other stakers. In fact, the more popular or the bigger the network, the higher the number of participants.
Some Proof-of-Stake networks, like Ethereum, are so big that some 375,000 validators are staking over 12.5 million ETH (Ethereum.org as of April 2022). This means that even if you were to stake 125 ETH (worth approximately $288,000, April 2022), your share of the staked funds would only represent 0.001% of the total staked funds. That equates to you only getting a 0.001% chance of being selected as a validator and earn rewards.
Furthermore, many networks have their own set of rules for Validators. Some cap the number of validators and others enforce a minimum stake amount. Ethereum, for example, has a minimum amount of 32 ETH (approximately $80,000, April 2022) to start staking.
Fortunately, regular users who want to stake don’t have to face such daunting odds or such high financial entry barriers on their own.
Many larger validators run what is called a Staking Pool that individuals can join, adding their stakes to those of the validators. In this way, ordinary users can still participate in Staking without meeting the actual individual requirements of the network.
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