Staking refers to participating in the operations of a proof-of-stake (PoS) or delegated proof-of-stake (DPoS) blockchain by locking up a certain amount of cryptocurrency as collateral. Participants, known as validators or stakers, can earn additional crypto rewards in return for this commitment. ^[1][2]

Overview

Staking is a practice within blockchain and DeFi operations where participants lock cryptocurrency assets for a predetermined duration to support the functioning of the blockchain. In exchange for staking, participants receive additional cryptocurrency rewards. Numerous blockchains employ a proof-of-stake consensus mechanism, requiring network participants to stake specific amounts of cryptocurrency to validate new transactions and add blocks to the chain. ^[1]

The primary objective of staking is to ensure the inclusion of only authentic data and transactions in the blockchain. Participants seeking the opportunity to validate transactions commit to locking cryptocurrency amounts as a form of assurance. In the event of improper validation leading to the inclusion of flawed or fraudulent data, participants may incur penalties, including partial or complete loss of their stake. Conversely, accurate validation of legitimate transactions and data results in participants earning additional cryptocurrency as a reward. ^[1]

Notable cryptocurrencies that can be staked include ETH, ADA, SOL, AVAX, and DOT. Noteworthy exceptions are BTC and Dogecoin, both run on proof-of-work and can therefore not be staked. ^[4]

Governance Tokens Staking

Governance token staking involves staking tokens to gain voting power and influence over network governance decisions within a blockchain ecosystem. Token holders participate in governance activities such as proposing, discussing, and voting on protocol upgrades, parameter adjustments, or other changes to the network's rules and operations. ^[3][7]

By staking their tokens, holders demonstrate commitment to the network and are rewarded with the ability to shape its future direction and development. Examples of governance staking systems include HiIQ, veCRV, veFXS, etc. ^[7]

Proof-of-Stake Mechanism

In PoS-based blockchain networks, validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to "stake" as collateral. This contrasts with proof-of-work (PoW) systems, where validators (miners) compete to solve complex mathematical problems to create new blocks. ^[3]

Staking Risk

Staking frequently involves a designated lockup or "vesting" period, during which the transferred cryptocurrency remains inaccessible for a predetermined duration. This restriction poses a limitation, preventing the trading of staked tokens even if market prices undergo fluctuations. It is crucial to conduct thorough research on the individual staking requirements and regulations of each project before engaging in staking activities. ^[5]

Crypto Staking Benefits

Participating nodes in a network's validation process are rewarded with cryptocurrency or transaction fees, offering users a passive income stream. Staking not only boosts liquidity by enabling users to leverage idle holdings without selling them but also contributes to network security. Validators are incentivized to act in the network's best interest, with malicious actions risking stake confiscation, thereby deterring potential threats. ^[3]

Additionally, staking fosters decentralization by allowing broad participation in the validation process, mitigating the risk of a single entity controlling the network. This inclusive approach enhances security. Staking also presents an eco-friendly alternative to Proof of Work (PoW) mining, requiring significantly less computing power for transaction validation and block creation. ^[3]

Certain blockchain networks and DeFi protocols grant voting rights to users who stake their crypto e.g. the IQ token and HiIQ, empowering them to influence network governance. This active involvement allows stakeholders to propose, decide on, and shape protocol upgrades, changes, and improvements fostering a democratic and participatory environment within the network. ^[3]

Staking Technology

For holders who own cryptocurrencies utilizing a proof-of-stake blockchain, the option to stake tokens is available. Staking involves the temporary locking of assets to actively contribute to and enhance the security of the network's blockchain. In return for this commitment and participation in network validation, validators are rewarded with staking rewards denominated in the respective cryptocurrency. ^[1]

Users also have the option to establish a cryptocurrency wallet that supports staking functionalities. By storing tokens in such wallets, individuals can delegate a portion of their portfolio for staking. The process involves selecting from various staking pools to identify a suitable validator. These validators consolidate tokens from multiple participants, collectively enhancing the likelihood of generating blocks and receiving associated rewards. ^[1]

Staking Pool

A staking pool is a group of cryptocurrency holders who pool their coins to increase their chances of being selected as validators. By combining staking power, users can increase their chances of earning staking rewards, distributed proportionally to each pool member based on their contribution. ^[3]

Staking pools benefit individual users who may not have the resources or technical expertise to run their validator nodes. Instead, they can delegate their staking power to a pool and earn rewards without running a node. Staking pools can also benefit smaller investors with insufficient coins to meet the minimum staking requirements. By pooling their coins together with other users, they can meet the minimum staking requirements and start earning rewards. ^[3]

Exploits on Staking Platform

Helio

In December 2022, an unidentified group of attackers exploited an oracle issue on the BNB Chain-based staking platform Helio, resulting in the drainage of approximately $15 million in liquidity, according to on-chain data. ^[6]

Oracles, third-party services fetching external data for blockchains, are crucial for decentralized finance (DeFi) protocols to ensure the accuracy of their services. The Helio exploit occurred shortly after a $5 million attack on DeFi platform Ankr, where the attacker minted a substantial amount of aBNBc tokens, subsequently converted into approximately 5 million USDC. The Ankr exploit led to a 99% drop in aBNBc token prices, setting the stage for the subsequent Helio attack. ^[7]

It remains uncertain whether the same attacker or group orchestrated both incidents. Blockchain data indicates the Helio attacker acquired 183,000 aBNBc tokens with 10 BNB, leveraging delayed Oracle data to borrow $16 million worth of HAY stablecoin. The illicitly gained HAY was then exchanged for 15 million Binance USD (BUSD), as indicated by data from security firms BlockSec and PeckShield. ^[7]