Proof-of-Stake (PoS) is an umbrella term for Sybil resistance mechanisms that use native cryptoassets as collateral to determine participation in the consensus process of a blockchain network. Staking enables token holders to earn a share of network income (e.g. from transaction fees) in return for placing their capital in escrow and helping to maintain the network.

In comparison to Proof-of-Work, where participants are rewarded for solving cryptographic puzzles in order to validate transactions and create new blocks, Proof-of-Stake relies on economic skin in the game (“stake”) in the form of network tokens.

Generally speaking, protocols that use some form of staking do so to enforce that the interests of participants are aligned with what the network aims to achieve. To learn more about the different types of staking, check out our framework here.

Validators in staking networks are nodes backed by collateral in the form of cryptocurrency tokens (“stake”). Token holders that stake (“stakers”) contribute to the network security by selecting trustworthy validators (“delegation”) and increasing the cost of a potential attack. They receive tokens as compensation for this in proportion to their stake backing (“staking rewards”). The size of these rewards is also impacted by additional factors such as network issuance rates (inflation), transaction (and sometimes storage) fees spent within the network, staking participation rates, as well as validator-specific factors such as uptime, commission rates, etc.

To learn more about the concepts of validation and delegation, check out the 101 post of our introductory series on the Proof-of-Stake ecosystem.

To ensure that the nodes (in Proof-of-Stake: validators) participating in a network behave as intended, many protocols enforce penalties if a node provably deviates from pre-defined rules. Penalties can mean that locked (staked) collateral in the form of tokens is taken from the balances of stakers backing that node. This is usually referred to as slashing. Other forms of penalties including excluding a misbehaving node from participating in the protocol, or temporarily lowering the rewards stakers receive. Such penalties pose the main risk of participating in staking. Read our Proof-of-Stake 102 post to learn more about other risks and tradeoffs to consider before getting involved in staking.

A critical component in the staking process is the need to lock tokens in escrow. In many networks there is an additional enforced delay that needs to pass before staked tokens can be withdrawn. This withdrawal delay is often referred to as the unbonding or lockup period. 

One reason for these liquidity limitations is that protocols with staking need to ensure that slashings or other penalties can be enforced after the offense took place. If these limitations would not exist, a node could misbehave and instantly withdraw his stake, thereby avoiding penalties. In addition, lockup periods help with a variety of other goals like ensuring the safety of light clients, limiting validator turnover, and enforcing correlated penalties. 

There are new designs emerging to mitigate the downsides of liquidity restrictions associated with staking through tokenization of staked positions, which is often referred to as liquid staking or staking derivatives. To learn more about these topics, check out our comprehensive liquid staking report.

Most staking network tokens are listed on various centralized exchanges such as Binance, Coinbase, Bittrex, Kraken, Poloniex, Huobi, etc. We recommend using Coingecko to figure out on which markets the token you are looking for is available. Staking with Chorus One will require you to move tokens from the exchange you bought them from to your personal wallet.

You can use our services and stake in a non-custodial manner by setting up a wallet and taking control of your private keys. If you bought tokens on a centralized exchange platform, this will mean you will need to withdraw your tokens to your own wallet. Refer to our staking guide to learn about wallet options and how to stake in a non-custodial manner.

We have partnered with German-based cryptocurrency custodian Finoa to offer staking services to their customers. Some other custodians like Coinbase Custody also allow delegating to public validators like Chorus One on some of the supported networks.

Depending on your jurisdiction, staking reward taxation may vary. One approach that some industry groups are lobbying for is that staking rewards should be taxed only at the point when they are liquidated. Another view is that staking rewards should be accounted for when they are earned, which could be as often as every block! Many jurisdictions do not have clear guidelines yet on how staking rewards should be taxed. We are a founding member of the European Blockchain Association’s Proof of Stake Working Group (EUPoS) that seeks to educate European legislators about Proof-of-Stake to foster an innovation-friendly jurisdiction.

We recommend using services like CoinTracking, or if you are using a tax advisor, working with crypto taxation-focused firms like Pekuna in Germany to ensure you stay compliant while minimizing your tax burden.

To get a high-level overview, we recommend reading this article on the basics of staking and this post that covers the ecosystem of parties involved in staking networks. For other staking-related information, the recently launched Staking Academy is aggregating and curating high quality content and events in the space.

We are also producing a variety of content to keep you up-to-date on what is happening in the staking ecosystem:

• Chorus One Newsletter: This mailing list delivers updates about our company and interesting insights into the networks we support on a monthly basis. Check it out and subscribe to it here.

• Staking Economy: An newsletter that delivers commentary and updates on the staking ecosystem and important network events every 2 weeks featuring contributions from other staking providers. Read and subscribe to it here.

If you have any more questions or want to discuss staking with us, feel free to reach out via HubSpot, email, or on Telegram.