In its simplest form, staking is the term used to describe a situation where someone has something on the line. When you have something at stake, there is an inherent and implied risk and usually some opportunity for reward. If people are in a situation where they have something at stake, you might say they are participating in some kind of staking economy.
Each one of us always has something at stake. Every time we act, our reputation is at stake. If we place a bet on a sporting event, our bet is at stake. If we take a mortgage to buy a house, the house is at stake! These simple concepts form the basis of the new staking economy.
What does this have to do with blockchains?
A lot! Let’s start with what we mean by “blockchain”.
You can think about blocks like batches of transactions. On the Bitcoin blockchain, for example, the transactions are mostly people sending Bitcoin from one address to another.
Approximately every 10 minutes, a new batch begins and all the transactions that take place on the network are recorded in the next batch.
The result of this batching process is a record of what happened on the network. If you have a record of every batch that ever took place, you can determine who sent what to who, and how their account balances may have changed.
So where does this record of transactions live?
Great question! This record of transactions lives on thousands of peoples computers all over the world. These people are usually called miners, validators, full nodes, or network operators.
Of course, this poses some challenges. Like what happens if there is a disagreement about how much is in my account? Or worse, what if someone says there is more in their account than there actually is!?
What we’re left with is a trust problem. Which version of batches can we trust and how much is actually in our accounts!? Staking is one of the most promising solutions to this trust problem. People usually call this solution Proof of Stake.
How does Proof of Stake help with the trust problem?
In Proof of Stake systems, the people who maintain records of the batches have to put something at stake so they can be trusted by others. If these batch-maintainers have something at stake, they have something to lose. The collateral is an incentive for them to tell the truth about the records they keep and maintain the integrity of their batches.
If anyone finds out that the record of transactions they’re keeping is wrong or has been manipulated — they could lose what they have at stake!
In the table below we see a list of batch-maintainers for the Cosmos Network. In this Proof of Stake system, these participants are called Validators. In the column on the right, we see Voting Power. Voting Power represents the percentage of the total stake that this validator is responsible for.
At the time of writing this guide, bitfish was responsible for 7.49% of what was at stake in this network — almost 30 Million USD (13 million ATOMs).
If it were discovered that a validator was sharing batches that were falsified or manipulated, they would lose a portion of their stake depending on the rules of that particular Proof of Stake system.
Ok, sounds cool. What does all of this have to do with me?
In the example above, bitfish had almost 13 million ATOMs at stake, but the majority of these ATOMs didn’t actually belong to them. They received these ATOMs from hundreds of other network participants. In exchange for adding to bitfish’s stake, participants are eligible to earn rewards proportional to what they put up as stake.
Proof of Stake is a shared-risk shared-reward system.
There are many reasons why people like to participate in the staking economy.
- You could earn rewards proportional to how much you put up as stake. On Cosmos, for example, the rewards can be up to 11% annually.
- The more that a network has at stake the more secure it is. Certain types of network attacks have a cost that is proportional to how much is at stake. If you want to help secure a network, you can put something at stake.
- In some Proof of Stake systems, when you have something at stake, you get to vote on issues that matter for the health of the network and can help determine the future development of these systems.
Ok. I think I’m starting to get this staking thing now.
We hope so!
Staking is an exciting new idea and a big technological and social experiment. There is a lot more to unpack in the world of staking, but hopefully, this intro helped move your understanding of blockchains and staking forward just a little bit.
In future guides, I’ll share more about why staking is good for the environment, how it helps to solve some of the more technical challenges facing blockchains today, and I’ll cover more of the particulars about how some of the most popular Proof of Stake blockchains work today.