Staking, used in some blockchains, is like having a security deposit for the network.
Instead of relying on miners (like in Bitcoin), validators are chosen based on the amount
of crypto they lock up in a designated area. This discourages them from cheating
because if they do, they risk losing their staked assets.
Stakers play a similar role to notaries in the TradFi world. Notaries assess the legitimacy
and enforceability of legal documents, verify the identity of signatories, and make sure
the signatories are willing to sign without duress or intimidation. Notaries receive fees in
return for their verification services. Those fees, along with a combination of legal,
professional, and ethical incentives, deter them from committing fraud.
In DeFi, when users deposit assets into a staking pool, they are rewarded with transaction
fees paid by users who need to inscribe a new transaction on the blockchain. The
network keeps validators honest by putting their staked assets at risk.
Let’s take a look at an example.
Assume you have 100 ETH and decide to stake it on a PoS blockchain
network like Ethereum. The network offers an average annual staking
reward rate of 5%. The profit earned would be calculated as:
Annual reward = initial investment * annual reward rate
= 100 ETH * 0.05 = 5 ETH