What is staking?

Key takeaways:

• Staking is the process of locking your cryptocurrency holdings and earning rewards, similar to a high-yield savings account.
• Staking exists to secure the network and validate transactions on proof-of-stake (PoS) blockchains.
• You can use Phantom to stake your Solana directly within your crypto wallet or connect with popular liquid staking protocols like Marinade and Lido Finance.

Have you heard about staking but have no idea what it means? In this article, we’ll demystify staking and help you understand what staking is, why it exists, and how you can stake your tokens. Let’s get started.

What is staking?

For beginner crypto users, you can understand staking as the process of earning passive yield on your crypto holdings by committing (or “staking”) them to help support the network. Some of the blockchains that support staking include networks such as Solana, Ethereum, and Polygon.

From a user perspective, staking functions almost like a high-yield savings account. Think of staking like depositing money into a savings account, with yields paid out in cryptocurrency. As of April 18 2023, the annual percentage yield (APY) generated by top staking networks ranged from 3% to 8%.

At a typical bank, yield is generated by banks lending out and investing your deposits, and then sharing a small portion of the returns with you. When you stake your crypto, you receive rewards from the network. However, the actual process of generating rewards for stakers differs immensely from centralized finance.

How does staking work?

You earn rewards with staking because you put your crypto to work. Your staked crypto supports the network by helping determine which transactions are valid. This is done through a “consensus mechanism” — a way for distributed networks like blockchains to agree on the ledger's state.

To better understand how staking works, let’s quickly review the two most popular consensus mechanisms: proof-of-work and proof-of-stake.

Proof-of-work

Bitcoin – the first and largest cryptocurrency by market cap – uses a consensus mechanism called proof-of-work (PoW) to secure the network . Under this mechanism, the Bitcoin blockchain is secured by a decentralized network of computers — miners and nodes. Miners compete to solve complex mathematical problems. The fastest miner to do so adds a new block to the chain, receiving a block reward as an incentive. In contrast to PoS, solving these mathematical problems is extremely competitive and energy-intensive.

Because Bitcoin doesn’t use proof of stake, it doesn’t offer rewards in the form of “staking”. Only miners receive BTC rewards for securing the network. While anyone can technically become a miner, it’s often practically inaccessible for the average user because of the need for highly specialized equipment. 

Proof-of-stake

Proof-of-stake (PoS), as you have probably guessed, is the consensus mechanism that utilizes staking. PoS relies on users locking up (or “staking”) a certain amount of the network’s native token as a way to help maintain the security of the network. Network participants that directly stake on the blockchain are called “validators”. Validators are responsible for ensuring all transactions on the network are valid. In return for this work, validators receive staking rewards.

Different projects have their own unique ways of implementing consensus mechanisms, but generally, validators stake their tokens as collateral to guarantee good faith. Any malicious activity would risk them losing their staked tokens.

As a user, when you stake your crypto, you lock your assets in the network for a set period of time and “delegate” them to a validator. When validators receive staking rewards, they pass it on to everyone who has delegated their assets to them.

The actual rewards come from slightly different but similar sources for different blockchains. For instance, Solana pays stakers using newly-minted SOL tokens. On ETH, the rewards come from a mix of transaction fees and newly-minted ETH tokens as block rewards. Similarly, Polygon allocates 12% of its total supply to fund its staking reward program.

Liquid Staking

One of the drawbacks of staking is that by locking up your crypto, you lose out on the opportunity to use your crypto during the lockup period. This opportunity cost sometimes deters token holders, especially those who want to take advantage of trading opportunities. Liquid staking solves this by giving stakers derivative tokens that represent their staked tokens which can then be traded or used in decentralized finance (DeFi).

Here’s how a liquid staking service works in the case of ETH:

1. When you stake ETH, you receive a derivative ERC-20 token in return (such as stETH).  This token represents your ownership over your stake in a staking pool.
2. Your staked ETH gets distributed in staking pools or elected staking providers and starts accruing rewards. Your derivative token auto-compounds and grows in value.
3. When you want to un-stake your capital and rewards, you simply exchange your derivative tokens for it.

Liquid staking services allow you to use these derivative tokens in various DeFi applications – like borrowing and lending – all while accruing yield.

Here are two popular liquid staking platforms worth exploring:

Lido Finance

Lido lets users stake crypto on its platform while providing liquid tokens in return, which are 1:1 exchangeable with their staked assets. You can use these derivative tokens to participate in on-chain activities like trading and lending. For example, if you stake 3 SOL through LIDO, the platform will give you 3 stSOL tokens.

Stader Labs

Stader Labs is one of the largest liquid staking platforms, allowing you to stake your Polygon tokens easily. When you stake MATIC, you receive MaticX in return, Stader’s liquid staking token. You can lend MaticX on popular platforms like AAVE or swap it with your favorite cryptocurrencies on Quickswap.

What crypto can I stake and how do I start?

With Phantom, it’s easy to start staking and earning rewards.

SOL

Phantom offers a native SOL integration right within your wallet. You can delegate to Phantom’s SOL Validator with a few clicks.

ETH

You can stake ETH on your Phantom wallet via Lido.Finance. Here’s how:

1. Connect your Phantom wallet to the Lido’s staking portal.
2. Once connected, you’ll be able to see the available ETH, your staked amount and the average 7-day moving reward average.
3. Choose the amount of ETH you wish to stake and click “Submit.”
4. Approve the transaction on your Phantom wallet, pay the gas fees and your ETH will be staked.
5. In return, you’ll receive stETH in your wallet, which represents your staked ether and rewards in Lido.

MATIC

Stader Labs is Polygon’s leading liquid staking solution. You can stake your MATIC via your Phantom wallet in four easy steps:

1. Navigate to Stader Labs’ staking portal for Polygon. Click on “Connect wallet” in the right-hand corner of the page and accept the terms and conditions.
2. Choose “Phantom Wallet” from the list of available options and press the connect button on your wallet.
3. Now, you can choose the amount of MATIC you want to stake. You’ll also be able to see the amount of MaticX you’ll receive after staking.
4. Click on “stake,” approve the transaction and pay the gas fees. You'll receive MaticX once the transaction has been confirmed on the blockchain.