What is crypto staking and is the US about to ban it?

It’s been a wild few days in the crypto market. After a strong start to the year for most cryptocurrencies, we’ve actually seen significant selling pressure take hold over the past couple of days. Much of this has to do with specific news around crypto staking and the settlement that is made between crypto exchanges Kraken and the Securities and Exchange Commission (SEC) this week.

This settlement essentially results in Kraken paying the SEC $30 million and agreeing to shut down its efforts. Consequently, this announcement has sent shockwaves through the sector, with many crypto investors now worried about an outright ban on crypto betting for other exchanges and networks.

Special, Coin base (NASDAQ:COIN) CEO Brian Armstrong has come out quite vocally in support of efforts. Coinbase, like other exchanges, earns some revenue from providing such services to its clientele. Consequently, there is some skin in the game for Armstrong and others. That said, the message that technological growth and innovation should be encouraged in the US market is one that many can relate to.

Let’s dive into what staking is and why there is so much discussion about this topic right now.

What is Crypto Staking?

In the world of blockchain technology, there are two prominent ways blocks are added to an ever-growing chain. The “original” method of continuously adding blocks to an ever-growing blockchain, popularized by Bitcoin (BTC-USD), is called proof-of-work. This involves so-called “miners” with highly specialized computers solving complex mathematical problems in an attempt to validate transactions, earning Bitcoin for their trouble. This is a seriously energy-intensive process that has come under pressure from many inside and outside the crypto community.

Proof-of-stake consensus, on the other hand, involves the validation and addition of blocks to a given blockchain via so-called “nodes” that stake their tokens on the network. The deposited symbols are used to validate transactions, essentially allowing those with a higher stake (or more skin in the game) to earn bigger rewards. This incentivizes loyalty and historical performance in terms of how effective a node is at validating transactions. In particular, part of the effort can be cut in situations where nodes are down or acting maliciously in an attempt to protect the network.

Staking is much more energy efficient than mining, and this is one of the reasons Ethereum (ETH-USD) have recently switched to proof-of-stake from proof-of-work. However, a full-on crypto-staking crackdown could affect this sector broadly, with most altcoins and Ethereum-related projects now on proof-of-stake consensus.

There is no clear indication of what the SEC will pursue and whether it will be a full crackdown or case-by-case investigations of key exchanges. Nevertheless, this news is not welcome for investors. Thus, today’s decline of around 4% in the crypto market makes sense in light of this uncertainty.

As of the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publishing Guidelines.