Discover Staking
Dec 30, 2023
Some blockchains, known as Proof of Stake (PoS) blockchains, require validators to confirm the validity of transactions. There are no central entities that perform this task. Another validation process is Proof of Work (PoW), where cryptographic mining ensures the consistency of transactions recorded on the blockchain. Ethereum transitioned to a PoS mechanism in September 2022, while others like Polygon had already adopted it earlier.
For a validator, their role includes ensuring that a token is not spent twice, which would be too easy. Validators are incentivized to be honest, meaning they validate correct transactions through an economic mechanism:
The validator deposits tokens (MATIC, ETH, etc.). For example, it takes 32 ETH to become a validator on Ethereum.
In return, the validator receives compensation. The yield is typically around 5%. However, if they validate incorrect transactions, they can be penalized with a portion or the entirety of their deposit.
Staking refers to the act of depositing tokens to validate transactions and receive compensation. The amount of 32 ETH can be significant, representing $70,000 at the current exchange rate. Therefore, there are protocols known as Liquid Staking that allow the creation of pools without an entry requirement. Examples of such protocols include LIDO and Rocket Pool.