Crypto has many different aspects to it, all of which can be quite confusing. In this article I am going to try to explain how staking works.
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What is it?
In simple, when you “stake” your cryptocurrency, you’re locking it up for a period of time to help keep the network of that cryptocurrency running. I will explain how this works below.
How does staking work?
There is two ways in which Crypto currency transactions get validated. Proof of Work, and Proof of Stake.
Proof of Work (PoW) and Proof of Stake (PoS) are ways for people in a group to agree on something, without needing a leader or someone in charge. In the world of cryptocurrencies, these are used to make sure everyone agrees on the transactions.
The easiest way to think of it is like diary where everyone writes down what they spent money on, the diary being a big list of how much money everyone has. To do this, you need a system to make sure people aren’t lying or cheating when they add to the diary.
One person gets selected to add to the diary, but to add you need to stake your crypto so if you cheat you get punished, and if you don’t you get paid for work.
That is where PoS and PoW are used, today we will discuss Proof of Stake.
Here is an analogy to why we have proof of stake. Enter the Cryptoshire raffle:
Cryptoshire raffle!
Organisers
So you have a Town Fair (The Yearly Cryptoshire Town Fair), now a town fair will need people to organise it, and what better way to pick organisers then people who live in Cryposhire this will be done randomly using a raffle.
Buying tickets to become an organiser
In order to become an organiser of this amazing Town Fair you need to purchase a ticket to show you are serious about being an organiser, you need skin in the game. Like any raffle, you could buy 100 tickets but someone with 1 ticket could win and become the organiser. It just gives you a better chance. You keep these tickets forever, so the next years town fair will use those tickets.
Responsibilities for the organiser
If your ticket is drawn (Yay) you become the organiser, this means you are reasonable for organising the fair. This could be things such as setting up stalls. If you do this properly you will get a prize (More tickets) for your hard work.
Punishments for the organiser
If you do not do your job properly as the organiser, or you cheat, say you forge tickets to give yourself a better chance, you will be punished by losing some or all of the tickets you originally purchased to become the organiser meaning you have less chance to organise again. This ensures honesty when organising.
After the Fair
Whether or not you were chosen, your tickets remain safe unless you misbehaved. If you want, you can withdraw them from the raffle for the monetary value or keep them in for the next fair.
Relating It to Proof of Stake:
The penalty for cheating is incorrectly validating transactions.
The tickets are like the cryptocurrency you stake.
The raffle draw represents the random process of choosing a validator. A “raffle” in staking is usually a “pool” of people.
The chosen organiser is the validator who confirms transactions and adds them to the blockchain.
The prize is the reward (more cryptocurrency) given for helping the system.
Be sure to check out more blog posts about Crypto here:
And learn more about staking here:
https://www.coinbase.com/en-gb/learn/crypto-basics/what-is-staking
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