Crypto staking is a relatively new idea of generating passive income through holding an investment in a cryptocurrency or a digital coin.
It is not entirely risk-free and investors can lose cryptos by staking. However, the rewards are consistent and the investment process is easier as compared to the traditional mining process of cryptocurrencies.
What is Crypto Staking?
Crypto staking refers to holding cryptocurrency coins in a digital wallet to earn reweds. These rewards are paid in the form of interest (crypto coins) and a fraction of coins.
On the other side, staking helps cryptocurrency hosts to validate and build new blockchain blocks. It requires investment and participants. Thus, investors earn rewards and hosts build new blockchain blocks through staking.
For investors, crypto staking is similar to putting money in a savings account. Investors hold money in a bank account, and banks use it to earn a profit and share a fraction of that profit with the investor.
How Does Staking Work?
Cryptocurrencies built on the “point of stake” theme need to hold crypto coins.
POS is an alternative method of validating blockchain blocks. It chooses one of the “stakers” or holders of crypto coins to validate the blocks.
Usually, the blockchain protocol will choose any participant randomly. However, the selection chances increase for investors holding more coins.
This process is in contrast with the conventional “proof of work” or POW consensus. POW allows building new blockchain blocks on the ability to solve puzzles of blockchain protocol. This is also called “mining” of the protocol.
Thus, the idea to build new blockchain blocks rests on investing more in a crypto coin rather than providing proof of work or mining.
POS allows building new blocks through validators who hold crypto coins. These validators are chosen randomly by the protocol at specific intervals.
The POS theme allows investors to participate in building new blocks without investing in expensive hardware and without expertise in blockchain technology.
Some networks choose a single coin and others a two-coin POS system. The second is usually used for incentivizing investors who hold the main crypto coin in a digital wallet of the crypto provider.
Which Cryptocurrencies allow Staking?
Cryptocurrencies are built on blockchain technology. New crypto blocks can be built in two ways as discussed above.
Staking works for cryptocurrencies built on the “Proof of Stake” protocol. It is an alternative protocol to the commonly used “proof of work”.
These are the cryptos offering staking currently:
- Ethereum (ETH)
- Solana (SOL)
- Cardano (ADA)
- Luna (LUNA)
- Polkadot (DOT)
- Avalanche (AXE)
Ethereum is the leading cryptocurrency offering POS and staking. It is also the only cryptocurrency that offers POS and POW protocols or mining and staking at the same time.
How to Stake Cryptos?
Theoretically, staking is open to anyone. It does not require mining skills or special knowledge of how blockchain technology works, and neither does it requires expensive hardware as mining does.
As mentioned above, staking largely depends on the invested amount in a crypto coin. The higher the investment in a coin, the higher the chances of becoming a validator and earning rewards.
You can follow these simple steps to start staking easily.
The first step is to choose a cryptocurrency or digital coin to invest in. Currently, a few cryptos are offering to stake as mentioned above.
The second step is to open an account with the crypto provider or a crypto exchange allowing staking. You should also check the account opening and staking requirements in this step.
The next step is to download or use a digital wallet. This option will depend on whether you open a staking account directly with the cryptocurrency or a digital exchange.
Complete your installation and hardware requirements. Some crypto and exchanges allow automation of staking. Whereas others would require active participation from your side.
Learn the fundamentals of staking and start investing in your chosen digital asset.
You’ll earn a reward as long as you hold the digital asset in your staking account. Always check the withdrawal limits and the holding period before investing your money.
A staking pool is a term that refers to a group of crypto coin investors joining hands to increase their chances of validating blockchain blocks (staking).
As mentioned above, staking depends on the invested amount. Therefore, a group of like-minded investors can come together to forge a single staking account.
The concept has evolved to professional service providers. Now some cryptocurrency platforms offer staking services as a staking pool. When they earn rewards, they share a fraction of that reward with their pool members.
This practice of staking pool increases the chances of success for individual participants but reduces their rewards.
Participation through the staking pool also reduces risks for individual investors. However, it will lower the rewards earned as compared to directly investing or staking with a crypto coin.
Cold staking means holding crypto coins in an offline digital wallet. In other words, a digital wallet is not always connected to the internet.
Some crypto coin providers offering staking services also offer cold staking. This service is suitable for investors seeking passive income through staking.
Cold staking is also commonly used by large investors who want to maximize the security of their investment in a staking account.
Can You Lose Crypto by Staking?
Yes, while staking may seem a flawless strategy, you can still lose crypto by staking. There are various reasons behind it but there are possibilities of losing money through staking like any other investment.
Participation in the staking and blockchain validation process requires serious consideration of technical skills and security requirements.
For instance, if you invest through a staking pool and the responsibility of the validation and earning rewards rests on the pool host, there are several risks.
If the staking pool fails to provide sufficient security protocols, all of the invested cryptos can be hacked.
You can also lose cryptos if your validator (or you as a validator) fails to proceed further.
Even when you are looking for passive income through staking, you’ll be at some degree of risk.
Pros and Cons of Crypto Staking
Crypto staking offers several advantages to investors.
Crypto Staking is an alternative approach to the conventional mining process of blockchain protocol. Thus, it further helps in the decentralization of blockchain technology.
Crypto staking offers an easy and simple way of crypto investing to retail investors without a need to learn blockchain codes or mining expertise.
Staking is helpful to investors of cryptos for the long term. They can earn rewards for passively holding their favorite crypto coins in a digital wallet.
Staking returns are also impressive as compared to volatile traditional crypto trading.
Crypto staking is not risk-free, it has some risks and limitations as well.
Staking yields results in the long term. Cryptocurrencies are highly volatile and a drop in the crypto price means a big loss in your staking rewards.
Staking platforms come with lock-up periods. Also, they’ll require some time if you want to withdraw your investment held in a staking account.
Staking pools are also prone to hacking and scams as are other cryptocurrencies. There are other security concerns as well.
Staking rewards depend on the success of the validator. So, if the validator in a staking pool fails to achieve effective results, it will affect your returns.