Staking refers to the act of engaging in a blockchain network by securing cryptocurrency to aid in functions like block validation and consensus. Users receive staking rewards, which offer motivation for upholding network security and aiding in the growth and stability of DeFi and other decentralized initiatives.
Staking rewards are earned by users who stake their cryptocurrency — usually additional tokens. These rewards are a way to incentivize participation so that the blockchain continues to operate, secure, and decentralized. In addition, the reward mechanism also pays validators for their job of verifying transactions and maintaining the network.
Staking is key to the success of DeFi (Decentralized Finance) and other decentralized initiatives for the provision of liquidity and security. Take staking, for example, as an example of which users can stake their coins into the security of DeFi protocols and liquidity pools in return for passive income. Also, staking reward incentives contribute to long-term token holding, which stabilizes the network and reduces price volatility.
Staking is used as a mechanism on Blockchain platforms like Ethereum 2.0, Polkadot, Solana, and Cardano to construct their consensus models. Unlike the traditional Proof of Work (PoW), in these systems validators are chosen that would be able to produce new blocks and verify transactions based on the portion of cryptocurrency they have staked, which is energy efficient.
There is a wallet or platform to stake individually or the service of pooling staking to get smaller holders together, decreasing the barrier of entry. Additionally, some platforms allow the liquid staking of your funds' value on their derivatives tokens, while the funds continue to be locked into the staking process.