What is Staking?

Short answer:

Staking is the crypto equivalent of putting your money into a high interest savings account (typically earning an average of 4-7% a year in interest).

Long answer:

It works like this…

You add your coins to a ‘staking pool’ which is hosted by a computer (aka a ‘validator’ or ‘stake pool operator’) that helps process groups of transactions on a cryptocurrency’s network.

For every group (or ‘block’) of transactions a single computer completes, it is rewarded with cryptocurrency. 

These rewards are then shared between the individuals that have ‘staked’ their coins in the staking pool, based on how many coins each user original contributed.

Eg: If there are 100 coins in the pool, 20 of which are yours, you get 20% of the rewards that are left after the ‘stake pool operator’ (i.e. the person who owns the computer that processes the transactions) takes their cut.

Some cryptocurrencies require you to commit your coins to a staking pool for a set amount of time, meaning you can’t access them.

This helps to lower the supply of the circulating currency and increase its value, so not only do you earn coins as a result of staking, but you also help to increase the value of each of your coins.

…but why are these ‘staking pools’ required to hold coins - can’t they just process transactions without them?

Think of these staked coins as a security deposit.

If the computer running the staking pool tries to edit or falsify transactions, it looses all of its staked coins and gets booted off the network.