Staking is one of the many ways users can earn passive income in the DeFi world. Staking is basically locking up the token in a smart contract and getting some rewards in return. It is akin to buying a bond and getting coupon payment in return for the deposit.
Staking is largely popularized by Ethereum 2.0. Ethereum 2.0 is an upgrade to the current Ethereum blockchain.
It aims to improve network efficiency, speed security and scalability. Ethereum 2.0 will see a shift from the traditional proof of work consensus to a far more energy-efficient proof of stake mechanism.
Currently, there is over nine million $ETH staked on Ethereum 2.0 smart contract. Staking it on the smart contract helps to enforce the network’s security and by doing so, the stakers are rewarded with tokens.
Let’s take staking on Ethereum 2.0 as an example. Similar to mining, staking ETH allows the user to validate transactions on the proof-of-stake blockchain. This will help secure the blockchain and at the same time validators are rewarded for keeping the chain secured.
The reward is given by the protocol and it is calculated based on a dynamic rule. If there are not a lot of ETH staked, more rewards are distributed to incentives stakers. Vice versa, if there are a lot of ETH staked, lesser rewards are distributed.