Proof of Stake is where we get the buzzword “staking”. In a Proof of Stake system, we no longer have miners to verify transactions—we now have “validators” who create blocks and secure the network. Validators, like miners, provide technology services to the blockchain. They run software to implement the consensus and validation process. They operate infrastructure hardware and software (akin to Internet service providers). Both miners and validators have a critical role in recording information to their respective blockchains and enabling decentralized systems, but they do so differently.

In order to participate, a Proof of Stake validator:

READY - downloads the blockchain’s client software from the blockchain project’s open source repository (e.g. Github) and runs the software. All s/he needs is a computer and an Internet connection.

STAKE - create a vault and lock the blockchain’s native tokens on the network as their “stake.” For example, in the Avalanche blockchain, the validator would do this with AVAX. The more tokens a validator deposits, the greater evidence of commitment.

SECURE - having staked the tokens, the validator can then create blocks and thereby secure the blockchain.

REWARD - receives staking rewards for their efforts (in the form of native tokens).

Who can become a validator? Not everyone can become a validator because there is usually a minimum number of tokens that validators must stake (depending on the blockchain). This value is stipulated in the network software and is usually a reasonable amount because being a validator should not be taken lightly. It is a commitment to protecting the blockchain.

Regular users that do not have the necessary amount of tokens can still contribute and receive rewards by delegating tokens to one or more existing validators. That’s where we get the name delegators.. Staking can be done directly in a self-custodial crypto wallet.

What happens to the tokens once they are staked? Nothing, staking does not change the fundamental nature of the staked tokens. The tokens are simply locked in the network to enforce the validator’s commitment.

Where do staking rewards come from? Most proof of stake-based blockchains allocate some number of tokens in the programming as staking rewards. Those tokens do not exist until validators satisfy the criteria for validation, following which the tokens are automatically created through autonomously functioning code.

What we have explained so far is “protocol staking.” It should not be confused with “yield farming,” which is also sometimes misleadingly called “staking.” In yield farming, holders provide their liquidity to one or more DeFi protocols for purposes of facilitating trading, lending or similar activities. As such, yield farming is more akin to trading, whereas staking is much more about running technical infrastructure to maintain the security and increase the decentralization of a blockchain, and thereby receiving rewards from the protocol.