evai staking explainer graphic

Staking Explained: What Is Crypto Staking and How Does It Work?(6 min read)

The process of cryptocurrency staking entails locking up digital assets within a network to secure the blockchain and verify transactions—allowing users to earn passive income for the trouble. Cryptocurrency staking is often equated to dividend-yielding stocks or other such interest-bearing investments. But it’s far more involved than that. Here’s everything you need to know.

Overview:

  • Proof-of-stake was conceived in 2012 as a much more efficient and scalable variant of proof-of-work
  • Staking participants are chosen quasi-randomly to verify transactions
  • The mechanism works similar to a lottery, rewarding users proportionally to their digital asset holdings

All cryptocurrencies come equipped with some method of rewarding users for securing the network and confirming transactions. As previously explained, for bitcoin, this mechanism is known as proof-of-work (PoW) and compensates users, or “miners,” for solving complex equations that verify transactions. The problem is, due to the immense computational work and powerful equipment needed to solve these equations, PoW devours an enormous amount of energy.

To illustrate the extent of PoW’s enormous energy cravings, bitcoin’s current power consumption is estimated to rival that of Switzerland.

Swiss flag

Fortunately, another, less power-hungry alternative came along: proof-of-stake.

Unlike PoW, where the most powerful machines reap the rewards and dominate the hashing power, proof of stake or PoS systems apportion greater rewards—along with a greater probability of approving and validating network transactions—to those holding the largest “stake” of cryptocurrency.

Because PoS eliminates the need for energy-sapping mining machines, it’s much more efficient than PoW, allowing for speedier transactions, higher throughput, and perhaps most importantly, scalability.

How staking works

Cardano, Tezos, Neo, and, after its latest upgrade, Ethereum, are all underpinned by PoS-based blockchains. But no two staking networks are the same; they all come with varying rules and customs.

In theory, however, staking works as follows:

  • Network participants are chosen at ‘random’ to validate a block of transactions
  • Users who hold a larger stake for longer have a higher chance of being selected as a validator
  • Validators are compensated via network transaction fees and newly minted cryptocurrencies

Different PoS systems have different approaches when it comes to validator selection. Two of these rules include “coin-age selection” and “randomized block selection.” Both methods aim to avoid the wealthiest users being continually selected over those holding less of a stake.

graphic depiction of a crypto staking network

Randomized block selection is more calculated than the name lets on. It elects the next validator by seeking out a user with both the lowest hash value and the largest stake—ensuring a different validator each time.

Coin-age selection, sometimes used in conjunction with randomization, picks the validator based on how long the cryptocurrency has been staked for. 

The coin-age calculation multiplies the number of coins at stake with the number of days they’ve been staked. Coins that have remained unspent for over 30 days compete for the right to verify the block, with preference given to the oldest and largest set of coins. Once that validator and their stake have been used, their coin age resets to zero, and they have to wait a minimum of 30 days to compete again. 

Staking rewards also differ between networks. Some offer a fixed return, but percentages can still vary depending on the following factors:

  • How long a validator has been staking and how much cryptocurrency they’re staking
  • The aggregate total staked within the network
  • The inflation rate of the protocol

How and where to stake

There are several ways to stake, depending on your level of expertise and risk appetite. But in most instances, staking occurs via a supported cryptocurrency wallet.

digital cryptocurrency wallet

Staking via a wallet can be a tricky business, as they require constant uptime and upkeep. Moreover, some staking networks require a minimum deposit and lockup period. Ethereum, for example, demands 32 ETH in order to start staking and a lockup of 18 months.

With a fairly high technical and financial bar for entry, another popular method includes staking pools in which users collate their holdings into a single pot to grab a better chance at the prize. Staking pool rewards are paid out proportionally to how much a user has chipped in and often require a low minimum deposit and little to no lockup times.

A brief history

Pseudonymous developer Sunny King introduced the first proof-of-stake-based cryptocurrency, peercoin, in 2012. The peercoin whitepaper, detailing the ins and outs of PoS, was met with high acclaim and has since gone on to influence scores of other PoS-based cryptocurrencies, including Ethereum which recently transitioned to a new PoS blockchain, and, of course, EVAI.

Evai.io logo

Being an ERC-20 token, EVAI’s blockchain consensus is achieved via the ethereum blockchain. Ethereum miners validate all transactions on the ethereum blockchain, and since Evai exists on the same blockchain, all of its transactions are validated by those same miners.

Evai also incorporates its own staking mechanism as a measure to ensure against undue volatility arising from post-listing sell pressure. Investor holdings are locked within the Evai wallet until 1st June 2021. And Evai founder’s token allocations will remain restricted for five years from December 1st, 2020. 

Founders are only permitted to sell up to 10% of their holding from the end of each six-month period from the commencement of staking (Dec 1st, 2020). In this way, the founders will be strongly incentivised to work for the benefit of Evai to provide ongoing price stability and growth.

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About Evai: 

Evai aims to establish the world’s first independent ratings service for evaluating the true worth of cryptocurrencies. The platform combines economic research, machine learning, and AI to pioneer a new approach to crypto ratings.

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