Over the years, staking – within the context of cryptocurrency – has gained a lot of interest, thanks to the benefit of passive income it comes with. Through crypto staking, you can earn cryptocurrency just by holding it. If you are someone contemplating whether or not you should try your hands in staking, this post could help you with your decision. In this article, we are going to first understand how staking works and the various benefits of staking crypto.
Crypto Staking Simplified
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To understand how crypto staking works, consider this – You and other users offer crypto coins to a blockchain network. The blockchain network will then pick a user as a validator for the purpose of confirming the transactions. After the validator has successfully confirmed it, new crypto coins are rewarded to the entity.
Crypto staking refers to the process where digital assets are locked up for the purpose of earning rewards or interest. In other words, the assets get pledged with the intent to assist with proof-of-stake blockchain consensus mechanism. This helps to validate transactions and secure the blockchain protocol. In exchange, you receive passive staking profits.
What Is Proof-Of-Stake (PoS)?
It is a kind of consensus mechanism (set of rules/system of agreement) for blockchain networks. The network’s nodes pledge stakes of tokens for a specific duration. This is done for a chance at getting to validate new transactions. Validator is a term used to denote the node that gets chosen. The validator proposes a block of transactions. Other validators get involved to verify and approve it. The block gets added to the blockchain.
The chances of your token getting selected increases when you stake more tokens.
The information will be then written in the new block, and the locked and staked token would be used for validation.
Is Staking Crypto Right For Me?
Whether or not you should undertake crypto staking comes down to your trading strategy. If you are the kind who prefers to leave the token in your crypto wallet till the market moves in a positive direction, then the staking strategy is probably a good option for you. But, if you are a day-trader who wants quick access to tokens, then this route may not be the best option for you.
Benefits Of Staking Crypto
There are many benefits of staking crypto. Following are just a few of them:
- One of the forefront benefits of staking crypto is the passive income you can make. Staking does not require much effort and you can undertake it in just a few clicks. There are a number of Proof-Of-Stake-based cryptos that lets one stake and earn interest.
- You don’t require any expensive equipment for crypto staking. To participate, all that is needed is a blockchain protocol that supports the PoS model and native tokens.
- Another one of the benefits of staking crypto is that it is very cost-efficient. When compared with other investment strategies (passive income) for traditional financial assets, the fees associated with crypto staking is on the lower side.
- Thanks to its limited environmental footprint, crypto staking is an environment-friendly alternative to crypto mining. Specialized computers are used for mining. This in turn means significant financial cost as well as considerable energy requirements. Staking, on the other hand, is low cost and energy efficient. Your staked coins can validate transactions, and you get higher rewards (depending on how much you have staked), without the same impact that mining has on the environment.
- Crypto staking is beginner friendly if you choose to do it through exchanges or staking pools.
- There is potential to earn well through crypto staking. You can compare staking rewards with stock dividend payouts – the two are types of passive income source. You don’t have to do much, besides holding the right assets at the right place for a specific timeframe. The longer your coins remain staked, your chance to earn more increases. .
- Staking is beneficial for the blockchain. With more and more users undertaking it, the blockchain becomes quicker. This works to your benefit if you hold that particular blockchain’s native coin as the price is more likely to rise.
- One of the significant benefits of staking crypto is that you get to help secure the network. You have an important role in supporting the security as well as the performance of the underlying blockchain network of the crypto.
As you can see there is much to gain through crypto staking. It is potentially a very profitable means to invest your funds. The only thing you require is crypto that makes use of the proof-of-stake model. However, before you proceed, please remember that with any investment channels, there are risks involved. Let us look at some of the risks involved with this strategy to help you make an informed decision.
Risks Of Crypto Staking
- There is always the risk of a blockchain project failing. It is therefore important not to solely go after tokens with the most staking rewards. Some reasons why a project cannot succeed include lack of development, lack of real-world adoption and token value weakening, resulting in crypto investors losing confidence. Choose a blockchain project with leading-edge technology, a long-term roadmap and an active community.
- Some assets that can be staked have a lock up period. During this time you won’t be able to access your staked assets. So, in the event the price of your staked asset goes down considerably and you cannot unstake it, your overall returns take a hit.
- Crypto, as you may be aware, is volatile in nature. This essentially means that price swings are common. As a result, you may find yourself rethinking your strategy on a regular basis.
- Operating a validator node necessities technical knowledge to ensure that the staking process is in no way disrupted. Nodes must have 100% uptime for maximizing staking returns. Should a validator node misbehave, penalties may be levied. Validators could even see their stake slashed.
- There is always the risk of losing the private keys of your wallet keys or your funds get stolen. It is vital that you back up your wallet and safely store your private keys.
As you can see, there are benefits of staking crypto as well as some cons to it. Before you stake assets, please make sure to weigh them both and accordingly go ahead, depending on your risk appetite.
How To Stake Crypto?
If you have decided to stake crypto, the first thing you need to do is buy a cryptocurrency. Pick a cryptocurrency exchange that comes with a built-in staking feature. Please note that not every crypto platform allows crypto staking. The exchange might have a staking page or you may see a staking option on your portfolio.
Another method by which you can stake crypto is through a staking pool. The pool will comprise of crypto funds pooled together by users with the intent of earning more rewards. If you prefer this mode, you may be required to transfer your crypto to a crypto wallet. After this, you can pick a staking pool and send the crypto via your wallet.
Please note, the exchanges / platforms will have differing rules and fees. You need to spend some time going through them to make sure that your goals match with a certain exchange / platform before you go ahead.
In the world of cryptocurrency, staking is an important concept. As more and more users hold onto their assets for longer duration, staking offers a great means to earn interest. Exchanges and pools have differing rules on the period for which your coins remain staked and how rewards get paid out. So make sure you familiarize yourself with the terms before you stake coins.
How does staking crypto make money?
Whenever a block gets added to the blockchain, new crypto coins get minted. They are then distributed to the validator of the block in the form of staking rewards. Often times, the rewards are the same kind of cryptocurrency that users stake. There are, however, some blockchains that distribute different kind of cryptocurrency as rewards.
Is there a downside to staking crypto?
Just like there are benefits of staking crypto, there are risks involved. Considering their volatile nature, crypto prices can fall down quickly. In the event your staked assets see a significant decrease, it could outweigh the interest you earn on the staked assets.
What is Ethereum staking?
This denotes the act of depositing 32 ETH for activating validator software. A validator is then in charge of processing transactions, storing data and adding blocks to the blockchain. These measures help keep Ethereum secure, and in return, you receive new ETH.