Table of Contents
What is staking?
Crypto staking is a way of earning passive income, and it is the crypto world's equivalent of earning interest or dividends while holding onto your underlying assets.
- Staking is one of the best ways crypto users generate passive income.
- Proof-of-stake(PoS) offers validators rewards for confirming the authenticity of blockchain transactions.
- Staking can be done directly on the blockchain network, cryptocurrency exchanges, or via pools.
- You must do extensive research before staking to prevent the loss of assets.
If you are looking for ways to make money from cryptocurrencies without hassle, you will come across crypto staking often. Staking is one of the most convenient ways to earn money in crypto because it costs almost no time.
Staking in crypto is the traditional banking equivalent of earning interest from a high-yield savings account. However, staking in crypto offers a greater percent reward compared to traditional banks. Over time, staking has become popular among many cryptocurrency users. If you are serious about earning lots of money passively in crypto, this article is for you! In this article, you will learn the A-Z of staking in crypto.
The Basics of Staking
Staking is the process of committing your crypto assets to help maintain the running and security of a blockchain. The blockchain operates on several mechanisms. One of such mechanisms is the proof-of-stake. In proof-of-stake blockchains, the users validate new blocks of transactions by committing their crypto assets to a pool.
How does staking work?
Like the traditional banking system, blockchain operates as an organized system of transactions. However, the system of transaction initiation, execution, and confirmation is superior to that of traditional banks. Blockchain is a public ledger that allows everyone to view the transaction history. There are consensus mechanisms to ensure the transparency of transactions on the blockchain network. The consensus mechanism is a set of rules and conditions that must be met before a transaction can be confirmed as authentic, thus keeping the blockchain secure.
Common types of consensus mechanisms include
What is the Proof-of-stake consensus mechanism?
Proof-of-stake is a cryptocurrency consensus mechanism where blocks(transactions) are confirmed with the machine of coin owners (stakers). Coin owners offer their coins as collateral as a prerequisite to validate blocks and earn rewards.
How does Proof-of-stake work?
When a user initiates a transaction, the message is encoded and sent to all the stakers. Validators are selected randomly to confirm the transaction, creating a new block in the blockchain. Staking doesn't require sophisticated equipment; you only need a wallet and a platform to stake your coins. The higher your stake, the more your reward.
A new block will only be generated after the network participants- known as the stakers, verify the transaction's authenticity. The stakers are users who purchase and lock their tokens in a pool. The stakers(validators) earn rewards for maintaining transaction validation and security. The rewards can be in the same native cryptocurrency, another crypto asset, or a stablecoin.
Becoming a validator on Proof-of-stake
A validator must commit a minimum amount of coins to run a node. For example, one must commit a minimum of 250 DOT to run a node on the Polkadot blockchain. Ethereum networks require a minimum of 32 ETH to run a node. Low and medium-value users may be unable to afford this huge minimum amount. Hence, validators run a staking pool and merge coins from different people by delegation, thus making staking accessible for anyone who wishes to participate.
- There are several ways to stake cryptocurrency. Some of the most common methods include:
- Staking directly on the blockchain network
- Staking through a cryptocurrency exchange
- Staking through a pool
The pool users connect their wallets to the pool or blockchain, and rewards are directly sent to the contributors’ wallets. Big crypto exchanges like Binance, Coinbase, and Kucoin also offer staking opportunities on their platforms. The reward each person gets depends on their contribution to the pool. The validators do the heavy lifting by providing logistics to stay online to confirm transactions.
To ensure the validation process remains transparent, validators are penalized if there is a breach of the code of conduct, such as going offline for prolonged periods.
Proof of work vs. Proof-of-stake
In the proof-of-work model, the network participants(miners) need to solve complex mathematical problems when a user initiates a transaction. The first node to solve the mathematical problem will confirm the transaction and earn the reward for the new block created. This model usually requires sophisticated equipment and software. More so, competition is fierce, leaving the weak miners at the mercy of sophisticated miners. However, in a proof-of-stake, the validators only need to be online to confirm a transaction, and rewards are randomly distributed based on the stake volume.
What cryptocurrencies can you stake?
As mentioned, staking is only possible with cryptocurrencies operating on a proof-of-stake consensus mechanism. The proof-of-stake popular cryptocurrencies include:
Features to look for when choosing a staking platform
Like the popular crypto saying, always "DYOR"- Do Your Own Research. Before investing in crypto staking, you need to do extensive research. Here are some things to look out for.
- Authenticity of the base crypto asset: Check the previous performance, whitepaper, and the overall perception of people about a crypto asset before investing in staking.
- Reliability of the platform: choose a staking platform with an uptime of 100% and a good history.
- Pool size: The larger the pool, the higher the chances of receiving block rewards. The pool size is usually displayed as the total amount of assets stakers commit.
- Platform fees: Most staking pools with a reasonable pool fee. Top staking pools take about 2-5%.
Read more: How to maximize yields on crypto
Here is a list of top staking platforms.
How can you start staking: A step-by-step guide
- Purchase crypto asset
To begin your staking journey, you need to purchase cryptocurrencies that can be staked.
- Transfer your asset to a staking platform.
After purchasing your desired digital assets, you'll need to transfer the crypto from your wallet to the exchange or platform that supports staking. Some platforms allow you to connect your wallet directly.
- Select your designed staking plan.
Staking platforms and blockchains offer varying interest rates based on the overall blockchain performance. Ethereum(ETH) offers rewards as high as 8.91%. However, the platform fee can also affect the accrued reward. The stake period also affects the reward.
There are some staking-as-a-service platforms that can help you find the highest staking reward rates. Examples of these platforms include.
Any coins you delegate to a staking pool are still intact in base value and will appreciate over time as the price moves higher. The staking rewards give you passive income as icing on the cake. You can withdraw your assets anytime you desire, but there is usually a window processing time specific to each blockchain.
Benefits of Staking in Crypto
- Passive income: You earn rewards on idle crypto assets even when the market price is dwindling.
- Cost-effective: Unlike crypto mining, you don't need equipment and sophisticated software for crypto staking.
- Environmentally friendly: Crypto staking obviates the need for equipment that consumes large amounts of electric energy while generating heat and environmentally hazardous by-products.
- Security: Staking improves the overall security of the blockchain, as it is impossible for transactions to be manipulated easily without the approval of validators.
- Price growth: when market prices increase, your staked assets increase in value alongside the rewards you earn.
- Ease of entry: it is easy to transfer your assets to the staking platforms at the speed of light since crypto transactions are very fast.
Risks of staking in crypto
Despite the many benefits of staking in crypto, there are some downsides.
- Price volatility: Crypto prices can drop quickly. Significant price drops can outweigh interest earned on staking.
- Poor security: some staking platforms can shut down, leading to temporary or permanent loss of assets. A good example of this is the FTX collapse which led to a huge loss of investment holdings. Beware of platforms that don’t have active social media and those bogus interest rates.
- Delayed asset retrieval: There is a minimum coin lock-up period. During this period, you are unable to sell or transfer your assets. However, you can cancel your subscription, which takes some time to process.
Crypto staking offers you one of the best ways to earn passive income in cryptocurrency without trading. Crypto staking is beneficial to you as a user as well as the blockchain. It's a win-win for all. With the increasing crackdown on the proof-of-work model as energy inefficient, proof-of-stake offers you a better option to maximize your earning potential at minimal costs.
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About the author
Adebajo Glory is a certified professional blockchain freelance writer with several published articles on blockchain architecture and management.