If you are a cryptocurrency investor, staking is a concept you will often hear about. Staking is how many cryptocurrencies verify their transactions, and it allows participants to earn rewards on their holdings.
But what is cryptocurrency staking ? Cryptocurrency staking is a process of committing your crypto assets to backing a blockchain network and confirming transactions.
It is available with cryptocurrencies that use the proof-of-stake model to process payments. This is a more power-efficient alternative to the original proof-of-work model. Proof of work requires mining devices that use computing power to solve mathematical equations.
Staking can be a great way to use your crypto to generate passive income , especially because some cryptocurrencies offer high interest rates for staking. Before you get started, it is important to understand how cryptocurrency staking works.
How does staking work in cryptocurrencies?
With cryptocurrencies that use the proof-of-stake model, staking is how new transactions are added to the blockchain .
First, participants commit their coins to the cryptocurrency protocol. From these participants, the protocol chooses validators to confirm transaction blocks. The more coins you donate, the more likely you are to be chosen as a validator.
Each time a block is added to the blockchain, new cryptocurrency coins are created and distributed as rewards to the validator of that block. In most cases, the rewards are of the same type as the cryptocurrencies participants stake. However, some blockchains use another type of cryptocurrency for rewards.
If you want to stake cryptocurrencies, you must own a cryptocurrency that uses the proof-of-stake model. Then you can choose how much you want to stake. You can do this through many popular cryptocurrency exchanges.
Your coins are still in your possession when you put them into play. You basically put these coins into play to work, and you are free to take them out later if you want to trade them. The destocking process may not be immediate; with some cryptocurrencies, you are required to stake coins for a minimum amount of time.
Staking is not an option for all types of cryptocurrencies. It is only available with cryptocurrencies that use the proof-of-stake model.
Many cryptocurrencies use the proof-of-work model to add blocks to their blockchains. The problem with proof of work is that it requires considerable computing power. This has led to high energy consumption by cryptocurrencies that use proof of work. Bitcoin in particular has been criticized for environmental reasons.
Proof of stake, on the other hand, does not require as much energy. This also makes it a more scalable option, capable of handling a larger number of transactions.
How to bet cryptocurrencies?
Staking cryptocurrencies can seem a bit confusing the first time around, but it’s a simple process once you get the hang of it. Here’s how to stake cryptocurrency, step by step.
Buy a cryptocurrency that uses proof of stake
As mentioned earlier, not all cryptocurrencies offer staking. You need a cryptocurrency that validates transactions with proof of stake. Here are some of the main cryptocurrencies you can stake and a bit of information about each one:
- Ethereum was the first cryptocurrency with a programmable blockchain that developers could use to build apps. Ethereum started out using proof-of-work, but is transitioning to a proof-of-stake model.
- Cardano is an ecological cryptocurrency. It was founded on peer-reviewed research and developed through evidence-based methods.
- Polkadot is a protocol that allows different blockchains to connect and work with each other.
- Solana is a blockchain designed for scalability since it offers fast transactions with low fees.
Start by learning more about the proof-of-stake cryptos you’re interested in, including how they work, their rewards, and the staking process for each one. Then you can search for the crypto you want and buy it on apps and cryptocurrency exchanges.
Transfer your crypto to a blockchain wallet
After purchasing your cryptocurrency, it will be available on the exchange where you purchased it. Some exchanges have their own staking programs with certain cryptocurrencies. If so, you can simply stake crypto directly on the exchange.
Otherwise, you will need to move your funds to a blockchain wallet, also known as a crypto wallet . Wallets are considered the best way to store cryptocurrencies securely.
When you have your wallet, choose the option to deposit cryptocurrencies, then select the type of cryptocurrencies you are depositing. This will give you a wallet address. Go to your exchange account and choose the option to withdraw your crypto. Copy and paste this wallet address to transfer your crypto from your exchange account to your wallet.
Join a staking pool
Although staking may work differently depending on the cryptocurrency, most use staking pools. Cryptocurrency traders combine their funds in these staking pools to have a better chance of earning rewards.
Research the staking pools available for the cryptocurrency you own. There are a few things to look for here:
- Reliability : You don’t earn rewards when servers in your staking pool are down. Choose one that has as close to 100% uptime as possible.
- Reasonable Fees : Most staking pools take a small portion of staking rewards as a fee. Reasonable amounts depend on the cryptocurrency, but 2-5% is common.
- Size : Smaller pools are less likely to be picked to clear blocks, but offer bigger rewards when picked, as they don’t need to split the rewards as much. You don’t want too small a pool which could potentially fail. On the other hand, some cryptos limit the amount of rewards a pool can get, so larger pools can become oversaturated. For most investors, mid-sized pools are best.
Once you find a pool, put your crypto into that pool through your wallet. That’s all you have to do, and you’ll start earning rewards.
What is Proof of Stake?
Proof of stake in cryptography is a consensus mechanism – a way for a blockchain to validate transactions. Nodes in a blockchain must agree on the current state of the blockchain and which transactions are valid.
There are different consensus mechanisms used by cryptocurrencies. Proof of stake is one of the most popular for its efficiency and because participants can earn rewards on the crypto they stake.
Staking rewards are an incentive that blockchains offer to participants. Each blockchain has a fixed amount of crypto rewards for validating a block of transactions. When you stake cryptocurrencies and are chosen to complete transactions, you receive these cryptocurrency rewards.
Benefits of cryptocurrency staking
Here are the benefits of cryptocurrency staking:
- It’s an easy way to earn interest on your cryptocurrency holdings.
- You don’t need any hardware for cryptocurrency staking like for cryptocurrency mining.
- You help maintain the security and efficiency of the blockchain.
- It’s greener than cryptocurrency mining.
The main benefit of staking is that you earn more crypto, and the interest rates can be very generous. In some cases, you can earn more than 10% or 20% per year. It is potentially a very profitable way to invest your money. And the only thing you need is a crypto that uses the proof of stake model.
Staking is also a way to support the blockchain of a cryptocurrency in which you have invested. These cryptocurrencies rely on staking holders to verify transactions and keep everything running smoothly.
Risks associated with cryptocurrency staking
There are a few risks of betting on crypto to understand:
- Cryptocurrency prices are volatile and can drop quickly. If the assets you have staked experience a sharp drop in price, it could exceed the interest you earn on those assets.
- Staking may require you to block your coins for a minimum amount of time. During this period, you cannot do anything with your staked assets, such as selling them.
- When you want to unblock your cryptocurrencies, there may be an unblocking period of seven days or more.
The biggest risk you face with crypto staking is that the price will go down. Keep this in mind if you find cryptocurrencies offering extremely high staking reward rates.
For example, many small cryptocurrency projects offer high rates to attract investors, but then their prices eventually crash. If you want to add cryptocurrencies to your portfolio but prefer lower risk, you can opt for cryptocurrency stocks.
Although the cryptocurrencies you stake are still yours, you must destock them before you can trade them again. It is important to know if there is a minimum blocking period and how long the destocking process takes in order to avoid unpleasant surprises.
Why don’t all cryptocurrencies have a staking system?
Cryptocurrencies must use the “proof-of-stake” consensus mechanism to enable staking. Many do not, and these cryptocurrencies cannot be staked.
Proof of stake is not the first or only consensus mechanism that cryptocurrencies can use. Proof of work was the first, since it originated from bitcoin. Other early cryptocurrencies followed in its footsteps until Peercoin introduced proof of stake in 2012.
There is a debate about the consensus mechanism being the safest option. Although the computing power required by proof-of-work uses substantial energy, it also makes proof-of-work blockchains difficult to attack. Some cryptocurrencies choose proof of work for this reason.
Another, less common, consensus mechanism is proof of combustion, where miners must burn (destroy) cryptocurrencies to validate transactions. No option is perfect, and cryptocurrency developers pick the one they prefer for their specific projects.
When should or shouldn’t you bet on cryptocurrencies?
If you have crypto that you can stake and you don’t plan to trade it in the near future, then you should stake it. It requires no work on your part, and you will earn more cryptocurrencies.
What if you don’t have any crypto yet that you can stake? Considering the returns you can get, it’s worth looking into staking cryptos. There are plenty that offer it, but be sure to assess whether each cryptocurrency is a good investment. Buying crypto for staking only makes sense if you also believe it is a good long-term investment.
The proof-of-stake model has been beneficial to both cryptocurrencies and investors. Cryptocurrencies can use proof of stake to process a large number of transactions at minimal costs. Cryptocurrency investors also have the option of earning passive income from their holdings.
Now that you know more about staking, you can start investigating cryptos that offer it.