The term staking within cryptocurrencies is used with two similar but slightly different meanings.
Proof of Stake vs. Proof of Work
The term comes from the so-called Poof of Stake (PoS), an alternative consensus algorithm to the Proof of Work (PoW) currently used by Bitcoin and Ethereum.
In fact, Ethereum itself is planning to switch from PoW to PoS with version 2.0.
PoS allows you to record transactions on the blockchain in a much cheaper way since it doesn’t involve mining.
The consensus comes from the fact that validating transactions are nodes that have staked a certain amount of tokens.
In this way, if the amount of tokens is significant, the users are interested in validating only the correct transactions.
In PoW instead, a lot of electricity consumption is required to do the work of finding the hash that validates the blocks and can be done by anyone, even without owning any tokens.
This consumption generates costs that miners have to cover with the income of their block validation activity, preferring to add transactions with higher fees.
In times of network congestion, the fees necessary to validate a transaction in a short time can be very high.
On the other hand, PoS has very low energy consumption, so validators do not need to have very high fees to cover very high costs.
In spite of this, they still collect fees, even if lower ones, therefore earning money.
Therefore, staking your tokens to validate transactions generates earnings, which are variable depending on several factors.
For this reason, many PoS-based cryptocurrency holders are staking their funds. On the one hand, tokens staked in this way cannot be used, sent or spent, until you remove them from the stake, but at the same time, they generate economic returns in the form of a percentage of fees paid by users.
Two different ways of staking with cryptocurrencies
However, there are two ways of staking your tokens on validator nodes of a PoS-based cryptocurrency.
The first is very simple and uses special services that allow you very simply to send your tokens to the node’s address, offering an interest in return.
Many exchanges offer this solution, and it is sufficient to search among the various services of the exchange if there is also staking (sometimes also called “earning” or similar).
Even if it is not a decentralized solution and not a custodian, it is very good to make the first operations of this type.
Obviously, you can only stake PoS-based cryptocurrencies (e.g., bitcoin is not).
The second way is to install and configure a validator node to stake your tokens. It’s definitely much harder to do, but it’s decentralized and, most importantly, non-custodian.
In many cases, doing something like this requires large sums of money to put in staking, but the gains are also higher.
Earnings from staking that exploit the PoS depend not only on the amount of tokens that are staked but also on how many have been staked in total by other users and how many fees are paid. In fact, users share the fees in proportion to how many tokens they have staked.
The other meaning of the term staking
However, over the course of time, another meaning of the term “staking” in cryptocurrency has spread.
In fact, the term comes from the English verb “to stake,” which means “to bet.” Some services allow you to “stake” your tokens in exchange for a return. Often, the earnings obtained in this way derive from the fact that these tokens put in staking are, for example, lent to other users in exchange for an interest.
From a strictly technical point of view, this second meaning of staking should be considered improper, but by now, its use is so widespread that it is commonly used.
The advantage is that the second type of staking can also be done with cryptocurrencies that are not based on PoS, such as Bitcoin.
In order to earn with this second type of staking, you need to send your tokens to services that immobilize them in exchange for a return. Several services allow you to do this; however, they are usually centralized and custodian.
In addition, the promised returns are often variable, depending on the state of the market at that time, so it is impossible to know in advance exactly how much you will earn unless the service provider proposes fixed returns (which is very rare).
Finally, we must remember that all these gains are paid in the same cryptocurrency or in the same token that has been staked, and that usually has a very variable value.
Only stablecoins allow you to get earnings in a token whose value is not very volatile.