What is staking?
Put simply, staking is way to earn rewards (usually tokens) for owning a crypto currency. Staking involves "locking up" a portion of your tokens so they can be used to generate more tokens on a blockchain.
How does staking work?
Staking varies depending on which blockchain you are dealing with, but generally it is similar to how a savings account at a bank works. You deposit your funds into an account and the bank gives you "interest" on your funds as long as you keep your money in the account. The bank uses your funds to invest and make money for themselves. You can take your funds out of your account at any time, but as long as you leave your money in the account, you collect interest.
With staking, it is very similar. You deposit your tokens into a wallet/exchange account. They use your funds to earn tokens from the blockchain. They keep the majority of the tokens that they "earn" and give you "rewards" for letting them use your tokens. You can take your funds out of your account at any time, but as long as you leave them in your wallet/exchange account, you earn rewards.
Break it down a little bit more. How does it really work?
Proof-of-Stake (PoS) is a consensus mechanism which produces and validates new blocks on a PoS blockchain. Only a validator can produce and validate a new block. The consensus mechanism chooses which validators get to do this and which validator gets a reward for providing this service.
Basically it works like this:
- Each validator "locks up" a bunch of coins to prove that they are committed to the blockchain.
- The PoS consensus mechanism randomly selects from the pool of validators to who will get the opportunity to produce and validate the next block on the blockchain
- The larger the staked amount, the higher the chance of been chosen to create the new block.
- The validator that is chosen to create a new block, receives a reward so there is an incentive to stake more coins.
Can I earn rewards by staking in XUMM?
The XRP Ledger is not a Proof-of-Stake blockchain. The XRPL uses the XRPL Consensus Protocol to validate transactions and does not rely on staking like a PoS blockchain does.
Basically, the core principle behind the consensus mechanism on the XRPL is that trusted validators agree on which transactions are valid. There is no need to stake coins to do this. The XRPL validation process is not a competitive based system, it is a cooperative based system.
So I can't earn XRP by using XUMM?
The XRPL doesn't offer an incentivization model for holders. All fees charged by the XRP Ledger are destroyed and XUMM does not charge any fees so there is no way for us to generate "rewards" for users.
...but I read somewhere that I can stake tokens on the XRPL...
A couple of tokens issuers have created various "staking" schemes on the XRPL. If you wish to participate in these schemes, please contact the token issuers directly for instructions. Make sure that you fully understand how they plan to generate returns and only risk funds you are prepared to lose. Xumm does not endorse or support any staking programs.
If you are interested in learning more about how the XRPL Consensus Protocol works, check out this article:
We understand that you might have additional questions regarding this topic so you are welcome to contact us any time via the XUMM Support xApp in XUMM or you can simply scan this QR code with XUMM and be directed there automatically.