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Staking and delegating crypto are both crucial processes for the smooth and correct functioning of certain blockchains. While these concepts are related, they serve separate purposes and involve different levels of technical knowledge, risk and responsibility. Both processes can earn crypto holders rewards in the form of more tokens, but also come with trade-offs in terms of control, complexity and exposure to potential penalties.
In this article, we explore the two concepts of staking and delegating crypto, to iron out doubts regarding the differences, the risks involved, and the benefits of each process.
What does staking crypto mean?
Crypto staking is the process of committing your cryptocurrency to a given blockchain network, such as Ethereum, Cardano, or Solana, to help maintain security and operations. Blockchains that use staking in this way are also known as Proof of Stake (PoS) networks, which use staked tokens to validate transactions and reach consensus. Crypto users who choose to lock up their assets for validation purposes are known as stakers, and earn rewards for their contributions, often in the form of extra tokens. However, if they misuse their crypto and staking power, they could be at risk of penalties imposed by the network itself, leading to the slashing of tokens.
The alternative to PoS blockchains is PoW (Proof of Stake) blockchains, such as Bitcoin, which use a more energy-intensive method of validating transactions, known as mining. The mechanics of staking vary depending on the network, but the principles remain the same: crypto holders deposit tokens to validate transactions, making them temporarily inaccessible for trading or spending. The size of the reward stakers are given will depend on how much of their crypto holdings they locked up for staking. In some cases, staking can come with other benefits, such as governance rights, which gives stakers a voice in protocol upgrades, or policy decision-making.
What does delegating crypto mean?
Delegation is a subset of staking. Delegating crypto refers to the process of delegating staking rights or power to a trusted validator or staking pool, without directly participating in network validation yourself. Delegating crypto is often considered a practical way for crypto holders to participate in Proof of Stake (PoS) blockchain networks and earn rewards, without needing the technical knowledge and skills required to run a full validator node. When crypto holders delegate their tokens, they are essentially voting with their stake and supporting a validator to help secure the network and confirm crypto transactions.
In return, the holder receives a share of the staking reward, minus a commission fee. Despite the fact that during delegation the holder’s assets are temporarily locked and cannot be traded or used, the delegator retains full ownership. The main risk involved in delegation is if the validator engages in malicious or unreliable activity. In this case, the network may choose to penalize the validator by slashing a portion of their stake, which will also affect the delegator, i.e., the asset owner.
PoS vs. PoW
As we mentioned above, the alternative consensus protocol other than the Proof of Stake mechanism, is Proof of Work, or PoW. Blockchains that use Proof of Work consensus mechanisms, including Bitcoin, Dogecoin and Litecoin, rely on computational power and energy-intensive mining to validate transactions and secure the network. The reason PoW is considered energy-intensive is because it requires miners to solve complex cryptographic puzzles using high-powered servers that consume huge amounts of electricity, which has led to environmental concerns and high operation costs.
While the blockchain was created as a democratic software with no reliance on a central authority or institution, some in the crypto community have also voiced their concerns over how mining could be at risk of being centralized and monopolized by large institutions due to the costs involved. By contrast, Proof of Stake removes any risk of monopolisation or exclusivity by introducing a consensus mechanism that distributes work among all validators. The only barrier for entry is owning the cryptocurrency being validated. Another argument for PoS is its low energy consumption as it does not require as much computational resources. As a result, many newer blockchain networks are choosing Proof of Stake over Proof of Work, viewing it as a more sustainable, accessible, and scalable solution.
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