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What is staking?

Staking is the act of locking funds in smart contracts to earn rewards. Just like mining is for proof-of-work blockchains, staking applies to proof-of-stake blockchains. By depositing tokens into the blockchain’s smart contract, validators earn the right to process transactions by proving that they have a major “stake” in the network.

Typically, users are eligible to be randomly chosen as validators if they have staked a minimum amount of tokens or coins, as specified by the network. In general, users who stake large amounts of coins are more likely to be chosen as validators. When validators create a new block successfully, they will receive block rewards as staking rewards.

Similar to proof-of-work mining, it has become challenging for solo entities to become validators without owning significantly large amounts of tokens or coins. This has now resulted in users delegating their tokens to set validators, thereby distributing rewards to their contributors. For instance, as Ethereum migrates to PoS, users need to stake at least 32 ETH to become eligible as validators. Alternatively, they can stake less than 32 ETH through staking pools to earn rewards.

The calculation of staking rewards varies across blockchains and is dependent on multiple factors such as inflation rate, the total amount of tokens staked in the network, and the validator’s stake. Typically, there are two rates for staking rewards, one for running a validator node and another for users who delegate their stakes. However, in order to motivate validators to maintain the security of the blockchain, the reward rate for validators is usually higher.