Staking, in general, refers to the process of locking up funds in secure smart contracts to benefit the network in some manner, and being rewarded in return. The rewards generated can be thought of as the interest that accumulates on capital over time.
In the space of cryptocurrencies, the idea of staking was first popularised by the consensus mechanism known as Proof of Stake (PoS), which was described in Ethereum’s earliest whitepaper in 2013. In PoS, participants on the network stake funds to gain the privilege of validating transactions and mining new tokens of the currency. The staked tokens serve as a proof that the incentives of the miners are aligned with those of the network. In case of any malicious actions on part of the miners (such as passing false transactions), their stake could be potentially slashed (i.e. destroyed) as a penalty.
Staking to verify transactions for a network is a technically complex and demanding task. This is known as Masternode staking, which requires computers with high specifications that run full-time. The minimum staking amount is also quite high and could be considered a serious business investment. Masternode staking also brings with it certain special privileges on the network such as governance voting rights.
Other than Masternode staking, there are two other popular formats of generating rewards by locking up tokens for a blockchain protocol. Stake DAO offers both as wealth creating instruments: Staking as a Service, detailed below, and Liquidity Pools.
Staking as a Service
‘Staking as a Service’ is an offering by Stake DAO, where our platform allows users to participate in the PoS consensus mechanism for various blockchain networks by staking tokens right from their dashboard. Our smart contracts handle the duties of pooling user funds in the background and staking them on the appropriate network as a pool to yield the best possible rewards. These rewards are then proportionally distributed to all stakers on Stake DAO.
This form of PoS staking can be thought of as a toned-down version of Masternode staking, i.e. users do not have to handle any intensive technical responsibilities such as troubleshooting network nodes or running computers full-time. It is a relatively simple way of both creating personal wealth and securing the said network by participating as a staker.