Cryptocurrency is a trending topic these days. You may have come across news of investors reaping big money by trading in crypto. But, did you know there is another approach you can take for increasing your crypto holdings without buying more. Yes, that’s absolutely possible. Introducing Crypto Staking – a means by which you can earn rewards, simply by holding cryptocurrencies. Let’s understand this concept more in detail below.
What Is Crypto Staking?
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Think about depositing your funds in a bank – crypto staking functions in a similar format. An investor holds funds in a cryptocurrency wallet, and in return, receives rewards or interest.
The purpose behind an investor choosing to stake crypto is to support a blockchain network and confirm transactions.
Proof Of Stake:
When you are staking coins, the blockchain puts them to work. Those cryptocurrencies where staking is allowed uses a consensus mechanism, referred to as Proof of Stake. Cryptocurrency owners can stake coins and create validator nodes. As a block of transactions is ready for processing, the proof-of-stake will pick a validator node for reviewing the block. It will ascertain whether the transactions in the block are correct. If it is accurate, the block will be added to the blockchain and rewards will be given. On the other hand, should a validator propose adding a block that has inaccurate information, some of the staked holdings may be lost as a penalty (in a process termed slashing).
Crypto staking helps to prevent fraud and errors. When an individual proposes a new block (or votes to accept a block), his or her own cryptocurrency is put on the line. The more that is put at stake, the greater the chance of the individual receiving transaction fee rewards. But as stated above, in the event a proposed block is found to have inaccurate information, then some of the stake may be lost.
How To Stake Crypto
Anyone can get into staking. Below are some of the ways by which you can get started:
If you are just getting started, the right approach would be through a crypto exchange. The steps that you will need to take are listed below:
- Sign up on an online cryptocurrency exchange. A few of the exchanges offer staking in return for a commission.
- Compare the various cryptos on the basis of annual percentage yield, minimum stakes, etc.
- Then proceed to buy the required number of crypto tokens. If you are unsure how to go about it, please review the exchange’s help section.
- Input the amount you would like to stake and then add crypto to the staking pool.
In this approach, you may be required to leave your staking coins in the wallet of the trading account. Additionally, please note, here you do not have keys to your cryptocurrency, rather you are backing on the exchange to do it on behalf of you.
On some exchanges, you will find the option for staking coins under the main menu. While in others, the facility for staking may be listed under Earn. Before you opt for this route, not all the exchanges offer staking. Also, some exchanges, keeping in line with the regulations, may not permit you to stake cryptocurrency if you reside in certain locations.
Another route you can take is by running a staking node. The two mandates here would be having advanced technical skills and a hardware that remains online at all times. The plus point of this method is that you get higher rewards along with voting or controlling rights on certain blockchains.
To become a full validator, it is important to note that some of the requirements could be – a considerable investment, technical knowledge, and a dedicated computer that can undertake validations day or night (with no downtime). In comparison to the other two forms of staking, this method of staking has greater complexity.
Join A Pool
Lastly, you can stake by joining a staking pool run by another user. This is the best option if you don’t want an exchange to make your staking decisions or if you can’t find an exchange that supports the token you would like to stake.
Staking pools allow users to merge their stakes and divide the rewards. If you would like to stake through a pool, you will likely be required to transfer your crypto to a crypto wallet. Then you can send the crypto to the staking pool through your wallet. Here it is important that you look for a well set-up pool. A pool manager is assigned to manage the blockchain. A vital point to note is that there are fees associated with pools. This in turn leads the overall profits generated to be on the lower side.
What Are Crypto Staking Risks?
Just like with all forms of investments, staking in crypto involves its own fair share of risks. Listed below are a few of them:
The most significant risk while staking coins is the likelihood of a negative price fluctuation in the assets being staked. Let’s say, you are getting 25% in rewards for staking an asset, however, it goes down 50% in value through the year. You then end up incurring a loss.
You must carefully pick the assets you want to stake.
This is an all-too-common problem in the cryptocurrency world, and crypto staking is no exception. It is vital that you backup your wallet and store your private keys safely. It is recommended to stake using apps where you hold the private keys. This is safer compared with using custodial third-party staking platforms.
In case you decide to use exchanges or a third-party staking platform, see that they are 2FA implemented. Also, use strong passwords and don’t click on any links that you aren’t 100% certain about.
If you are staking coins that barely have any liquidity on the exchange, you may find it challenging to sell assets or convert the returns to any stable coin. It is thus advised to stake those liquid assets that have high trading volumes on crypto exchanges for mitigating liquidity risk.
Before you begin staking, it is important to see if a lock-up period is applicable. Should you choose the lockup staking, you won’t be able to access your coins during the time.
In the event that the price of your staked asset goes down substantially and you cannot unstake it, your overall returns would bear the impact. There are some coins available in both i.e. with or without lockup period. If you are looking to have complete control of your coins, go for one without a lock-up period. Before you stake, make sure to read all the terms carefully.
Benefits Of Crypto Staking
Staking is a great option to earn passive income. Besides this obvious benefit, here are a few reasons why you should consider cryptocurrency staking:
- You can easily earn interest on your holdings.
- You help to secure and maintain the efficiency of the network.
- When compared with crypto mining, crypto staking is more environmentally friendly.
- You don’t need any equipment for crypto staking, like you would for crypto mining.
Overall, staking is a great means to maximize your holding and generate passive income. Many users consider it to be just as profitable as mining. Unlike mining, you don’t have to deal with major overhead and electricity expenses.
Your earning will depend on several factors, like the block reward, size of staking pool, etc. Typically, the longer you stake crypto, the greater your payout would be. You must also take into account the coin’s value while calculating profits.
What are the risks of crypto staking?
Staking usually comes with a lockup period, where a user will not be able to transfer crypto for certain duration. This can be viewed as a hurdle as the individual cannot trade staked tokens during this time-frame, even when prices shift. Along with this, some of the other forms of risks associated include price volatility, product complexity, theft, etc.
Can you lose your crypto staking?
Yes, this is possible through slashing. In the event a user’s proposed block is found to have incorrect information, he or she can lose some of the stake. Slashing is a mechanism designed into proof of stake blockchain protocols for the purpose of deterring malicious validator behaviour.
Does your crypto grow while staking?
Your crypto earns rewards while staked as it is put to work by the blockchain. New crypto coins are minted whenever a block gets added to the blockchain. They then get distributed in the form of staking rewards to that block’s validator. In most cases, the rewards are the same kind of cryptocurrency that a user is staking. But, you will come across some blockchains that use another kind of cryptocurrency for rewards.
How much can you make staking crypto?
While a number of factors decide how much you make staking coins, you can earn anywhere from 5% to 10% or 20% p.a. on the cryptos you stake.