Crypto Staking can be compared to depositing money in a traditional bank account. When we deposit money in a bank account, the bank uses the funds to lend to others. The bank then gives us a nominal interest on the deposit we have made. Here’s everything you need to know about what staking in crypto, entails and how you can make the most of staking crypto 101.
What is Staking in Crypto?
So, what is staking? Staking crypto can help you earn passive income from the cryptocurrencies in your crypto wallet without the need to sell your crypto. For staking crypto, you need to lock your crypto with a blockchain that uses the cryptocurrencies to validate transactions.
You will earn rewards as a percentage of the crypto you staked, similar to the interest you earn for making deposits. The returns from staking crypto are much higher than most traditional financial instruments. However, with good rewards comes greater risk.
How Does Staking Crypto Work?
Now that we know what is staking in crypto let us understand how it works. Typically, cryptocurrencies use two types of consensus mechanisms to validate transactions on their blockchain. They are the proof-of-work and the proof-os-stake consensus mechanisms.
- Consensus Mechanism
Blockchain technology runs on the concept of adding blocks for each transaction to create a secure and uneditable digital database. To add transactions to the blockchain, a consensus method defines the system in which the transactions can get approved and added.
- Proof-of-work consensus mechanism
In this mechanism, complex mathematical equations must be solved to validate transactions. The ones who solve these complex problems are called ‘miners’. The first miner to solve the problem gets the transaction validated and added to the blockchain and gets certain rewards from the network. However, proof-of-work platforms could charge an extremely high transaction fee for mining and require a massive amount of computing power which is harmful to the environment.
- Proof-of-stake consensus mechanism
Before understanding what is staking, it is essential to understand the proof-of-stake consensus mechanism. In this mechanism, investors use the cryptocurrencies they own to validate transactions. The cryptocurrencies act as assets that are staked, and the higher the stake, the greater the chances of the transaction getting validated and added to the blockchain.
Key Takeaways
- Staking crypto can only be done for cryptocurrencies that follow proof-of-stake consensus mechanisms.
- Staking requires investors to lock their crypto in exchange for earning rewards.
- High the volume of the stake (more cryptocurrencies) higher the chances of the transaction getting validated.
- Staking pools combine the stakes from various investors. They are managed by stake pool operators who help validate transactions and distribute rewards.
How Can You Stake Crypto?
After understanding what is staking in crypto in detail, it is also important to know how it is done. Staking crypto may seem like a complex process, but here is a step-by-step breakdown for you to start your crypto staking journey. You will first need to buy the cryptocurrencies that offer staking options.
Considering that some cryptocurrencies also have limitations on the amount you can stake, do your research and assess if you can meet the staking requirements before buying the crypto. You can also choose the platform that offers rewards to best match the returns you expect.
What Cryptocurrencies You Can Stake?
Staking is possible only where a proof-of-stake consensus mechanism is used. To stake crypto, investors lock away their cryptocurrencies in a staking pool. This staking pool is managed by experts, often known as stake pool operators, who then validate transactions using a larger stake, increasing their chances of validating transactions. These cryptocurrencies can include Ethereum, Solana etc.
Ethereum (ETH)
Ethereum (ETH) – though it started as a proof-of-work consensus mechanism and is famous for its skyrocketing gas fee (transaction fee), Ethereum is one of the most popular blockchains will countless use cases as a programmable blockchain that developers use to create apps.
Cardano (ADA)
Cardano (ADA) – an environment-friendly alternative that also offers scalability.
Solana (SOL)
Solana (SOL) – its core function is scalability, which offers faster transactions at lower costs.
Luna (LUNA)
Luna crypto is Terra’s native token. It is a Korean blockchain pushing the top of the most trending cryptocurrencies.
Avalanche (AVAX)
Avalanche is a smart blockchain network crypto with great throughput. It is possible to secure this network through ‘proof of stake consensus.’
Polkadot (DOT)
Polkadot (DOT) – became popular for allowing interoperability between different blockchains to work together easily.
Did You Know?
While some exchanges offer their in-house staking options with certain cryptocurrencies, some require you to move your currencies to a blockchain wallet or a crypto wallet (like MataMask). These wallets can safely store your currencies.
Why Not All Cryptocurrencies Have Staking?
The underlying objective of staking is that every investor that stakes their crypto cannot have any malicious intent because if the value of the crypto falls, they will also lose out on their investment. Only the cryptocurrencies that operate on a proof-of-stake model allow for skating. There is no involvement of skating in cryptocurrencies that are proof-of-work, for example Bitcoin.
Is Crypto Staking Profitable?
Experienced crypto investors will find crypto staking to be a rewarding process wherein the investors can earn profits from simply holding cryptos and then putting it to work. Besides its profitable nature, staking also contributes to higher efficiency and security of the blockchain, making it completely unsusceptible to attacks in the cyber network. Simply put, staking in crypto can gain you profit with only a little effort.
When You Should or Shouldn’t Stake Crypto
If you have crypto that you can potentially stake, and you are not planning on staking it in the near future, then it would be best advised to stake it. This does not require much work, and you will actually earn more crypto.
It is, however, important to make sure that a particular currency is a good investment option or not. It is only sensible to buy crypto to stake if you think it is a good long-term option for investment.
Factors for Selecting a Staking Platform
To choose the most suitable staking pool, here are some important metrics to look for:
- Reliability – if the staking pool servers are down, you will not earn any rewards. Also, don’t get attracted to heavy rewards, do your due diligence before choosing a staking pool.
- Size of the Pool – as we already know that the volume of the stake is of the essence to validate transactions, investing in smaller pools would not be profitable even if they offer higher rewards. On the other hand, some platforms limit the number of rewards a pool can earn to provide an equal opportunity to all. Keep these in mind while scouting for staking pools.
- Reasonable Fees – Most staking pools charge a nominal fee to maintain exclusivity and to fund the pool operators. A fee of 2% to 5% is considered reasonable as of now.
Finally, you have understood what is staking, and once you’ve joined a pool, you can stake your crypto through the wallet, and you will soon start earning rewards!
While there are attractive benefits to crypto staking, there are also some important factors to consider and be aware of before you start staking crypto. Making an informed choice will take a long way with safe and consistent benefits. Let’s now understand the pros and cons of staking crypto.
Pros and Cons of Crypto Staking
The pros and cons of staking crypto are as follows:
Pros:
- Staking is a good way of earning passive income.
- Crypto staking is easy to carry out and does not require the use of massive computing equipment as needed for crypto mining.
- You contribute to the security and maintenance of the blockchain.
- You support the blockchain’s functions.
- Staking is more environmentally friendly than crypto mining.
- The returns are really good – more than 10 to 20% every year.
Cons:
Not everyone knows about what is staking in crypto. Here are some of the most crucial factors that investors must know before staking crypto:
- The crypto market is volatile. If the prices of a cryptocurrency fall while you have staked it, you cannot sell it to cut your losses since taking locks your cryptocurrencies. The price drop could exceed the rewards you earn from staking.
- Unstaking crypto takes almost seven days or more.
- Smaller crypto projects may offer high rewards rates but are more susceptible to market crashes. Therefore, the risk involved needs to be assessed for each staking opportunity.
- Staking pools could be hacked to look for pools that come with insurance to compensate you if you were to lose funds.
Conclusion
Though crypto staking is a wonderful way to put your dormant cryptocurrencies to good use and earn passive income, the cryptocurrency ecosystem is a fairly new space. Now that you know enough about what is crypto staking, don’t forget to do a good amount of research into the staking options available before starting your crypto journey!
Frequently Asked Questions (FAQs)
Amongst all the consensus mechanisms, proof-of-work is considered to be the most secure. There are also other consensus mechanisms. Every mechanism has its own advantages and disadvantages. Only if a cryptocurrency uses a proof-of-stake consensus mechanism staking is a possibility.
If you have invested in a cryptocurrency that offers staking, is not too volatile, and your objective was a long-term investment, you can consider staking the cryptocurrency.
If the market is extremely volatile and you are not sure you entirely understand what is staking in crypto and how it functions, avoid staking your crypto until the market stabilizes and you have gathered enough knowledge to choose the right cryptocurrency to stake.
Yes, staking crypto is very profitable and helps you earn passive income. It is especially a great investment option for long-term believers.
Yes. In a way, you can make money by skating crypto as here; you can use your digital assets for passive income without selling them.
Yes. It is possible to lose crypto through staking, even entirely at times when there is a cyber attack, for example, hacking of the staking pool.
The cryptocurrencies with a higher annual yield and a high staking market include ADA, ETH and SOL.
Yes. It is possible to grow your crypto wallet with time by receiving a certain percentage of returns on the efforts made in staking.
In case the assets you have staked face a huge price drop. It can potentially outweigh the interest you earn on these staked assets.
Traditional buy and hold, trading, lending, investing, cloud mining and affiliate programs are some ways through which you can earn every month from crypto.
Your coins remain to be in your possession at the time of staking. You can, however, choose to unstake them if you wish to trade at a later stage.
Read more about: Types of Cryptocurrency.
