What Is Staking? Proof of Stake Explained
Risk notice: This article is for general information only and is not financial or investment advice. Staking crypto-assets carries real risks, including price volatility, penalties and loss of funds. Do your own research and consider consulting a licensed advisor before staking.
Staking is often described as a way to “earn interest” on cryptocurrency. To understand what staking really is, you first need to understand proof of stake – the consensus mechanism behind it. This guide explains how staking works, the main variants, and the risks and debates around it.
What is proof of stake?
Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that select validators in proportion to how much of the associated cryptocurrency they hold. For a transaction to be recognized, it must be appended to the blockchain. In a PoS blockchain, the entities that do this are called minters or validators – the role that miners play in proof-of-work (PoW) blockchains – and in most protocols they receive a reward for doing so.
A blockchain must stop a malicious user or group from taking over the majority of validation. Proof of work does this by requiring an attacker to control a large share of the network’s computing power, which encourages huge energy consumption. Proof of stake instead requires validators to hold tokens, so an attacker would need to acquire a large fraction of all tokens on the chain. This makes PoS far more energy-efficient.
What is staking?
Staking means committing your tokens to this validation process, either by running a validator yourself or by supporting one. In return, stakers earn rewards. Research by Riposo and Gupta modelled the expected gain of a staker and showed that factors specific to PoS matter: slashing – penalties for misbehavior – reduces expected rewards, while Maximal Extractable Value (MEV) links transaction-fee extraction to staking gains.
What counts as “stake” varies. Some cryptocurrencies use “coin age” – the number of tokens multiplied by how long a user has held them – instead of just the number of tokens.
Main types of proof of stake
- Chain-based PoS: a modification of proof of work in which the difficulty of the puzzle depends on the participant’s stake, so large stakeholders need less computation.
- Nominated PoS (NPoS): a committee of validators is elected at random, with higher stakes giving higher odds. Polkadot uses a deterministic variant.
- BFT-based PoS: a randomly selected proposer offers a block, validators vote, and Byzantine fault tolerance finalizes the most-voted block. It works as long as no more than a third of validators are dishonest. Used in Tendermint and Casper FFG.
- Delegated PoS (DPoS): stakeholders elect a committee of “witnesses” who take turns proposing blocks. Fewer validators means faster consensus. Used by EOS, Lisk and Tron.
- Liquid PoS (LPoS): anyone can become a validator, but small holders usually delegate their voting rights to larger validators in exchange for benefits such as periodic payouts, and can switch at any time. Used by Tezos.
A brief history
The first functioning PoS cryptocurrency was Peercoin in 2012. Blackcoin, Nxt, Cardano and Algorand followed, although as of 2017 PoS coins were still less widely used than PoW coins. In September 2022 Ethereum, the second-largest cryptocurrency, switched from PoW to PoS – a move estimated to have cut its energy use by over 99%.
Risks and concerns
- Slashing: validators can be penalized for misbehavior, which reduces rewards.
- Security attacks: early PoS implementations suffered new kinds of attacks, such as long-range attacks that rewrite chain history, “nothing at stake” problems and bribery attacks.
- Centralization: critics argue PoS favours users with larger holdings, giving them more influence over a blockchain’s direction.
- Legal uncertainty: the US SEC has argued that staking rewards are equivalent to interest. In 2024 it approved Ethereum market funds only on condition that they did not stake their coins.
Staking levels differ widely: at that time, around 27% of ether’s supply was staked, compared with 66% for Cardano and 63% for Solana.
Energy use
A 2021 University of London study found that Bitcoin’s proof-of-work energy consumption was about a thousand times higher than that of the highest-consuming proof-of-stake system studied. In January 2022, Erik Thedéen, vice-chair of the European Securities and Markets Authority, called on the EU to ban proof of work in favour of proof of stake.
