Staking is when you lock up your crypto to help run a blockchain network.
This “stake” acts as a security deposit: help the network run smoothly and your deposit is returned to you with some interest as a reward. Engage in bad behavior, however, and you’ll be penalized–your stake will be “slashed”.
Blockchain networks that make use of staking are called Proof of Stake blockchains.
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"Show me the incentive, and I'll show you the outcome"
This popular quote from the late Charlie Munger can help us better understand staking.
Since blockchains are decentralized, with no single person or committee entrusted with decision-making power, they rely heavily on incentives–carrots and sticks that keep everything above board.
Staking is a great example, because it functions as both a carrot and a stick. When a validator stakes crypto, two things happen:
- They’re incentivized to behave honestly, because if they do so they can earn rewards (carrot) for their efforts in the form of more cryptocurrency.
- They’re deterred from behaving badly, because if they do so they can be penalized (stick) for their misbehavior. Their stake is “slashed”.
Rewards and penalties vary depending on the blockchain (e.g. Ethereum vs. Solana, both of which are Proof of Stake).
Penalties also vary based on the severity of the violation. For example, a validator may receive a relatively minor penalty for being offline (Proof of Stake networks depend on validators being online and actively participating) but a much larger penalty for malicious behavior (e.g., attempting to create an alternative blockchain history).
Terms you should know
Yield
The reward from staking, usually expressed as an annual percentage rate (APR).
Re-staking
When a validator stakes their earned rewards so that they increase the total amount staked.
Reward cycle
The interval when staking rewards are paid out.
Staking pool
A service that combines staked crypto from multiple holders for a fee, distributing rewards based on each participant's contribution.
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