Current blockchain protocols use – instead of the proof-of-work algorithm known from Bitcoin or Ethereum (also called “mining”) – a proof-of-stake algorithm and thus allow token holders to participate in the consensus mechanism as validators and receive remuneration (staking rewards) for doing so.
Instead of participating in the network as a validator themselves, the protocols usually also allow token holders to delegate the corresponding “staking function” of the token (i.e., the technical ability to participate in the consensus mechanism) to other validators. In this way, the “staking functions” of the delegated tokens are available to the validator to increase his own stake and support him in being able to perform his own validation activity more successfully.
Validators who want to open themselves up for delegation can often create a special “Staking Pool” Smart Contract for this purpose. In the corresponding smart contract, the validator defines the compensation to the token holder for his delegation. The delegated tokens always remain under the control of the token holder, so that the validator – except for the use of the “staking function” for his own validation activity – has no possibility to otherwise dispose of the tokens or to use other functionalities. The distribution of the newly created tokens to the validator and delegator is automated according to the specifications in the smart contract.
The transfer of tokens to providers of custody services (so-called custody wallet providers), which either accept customer deposits in virtual currencies on their own wallets and maintain respective accounts or manage customers’ third-party tokens on segregated wallets, and at the same time offer services in connection with staking, must be distinguished from the technical possibility of delegating the “staking function” described here.
Source mme.ch
