Since it was first introduced in 2009, cryptocurrency has skyrocketed in value. As more and more people become interested in cryptocurrency, more people have been looking for ways to make a fortune through cryptocurrency.
One way to make money from cryptocurrency is through crypto staking. Unlike crypto mining, this process does not involve advanced mining rigs and exuberant electricity consumption. But what exactly does cryptocurrency staking mean anyway? This article will delve into the basics for you to appreciate this process.
You'll understand why staking has become so popular in the world of cryptocurrency. You might even get inspired to venture into this endeavor to grow your wealth.
What does it mean to stake crypto?
Staking cryptocurrency is a great way to earn passive income. This process involves using cryptocurrencies to help verify transactions made on a blockchain network. Staking crypto is different from mining. However, both endeavors have potential rewards that far exceed the amount you make from your typical savings account.
Even though the term staking sounds complex, the process is straightforward in reality. In addition, many online exchanges are available, making staking more convenient for most people. In short, you don't need technical knowledge to stake crypto.
To appreciate how crypto staking works, you must go back to basics. Blockchain technology is 'decentralized,' which means there's no middleman like a bank involved. Instead, blockchain relies on users to collate blocks of recent transactions. These are then submitted for inclusion in an immutable historical record. In return, these users receive a transaction fee as a reward.
Staking plays an essential role in this process because it prevents fraud and possible errors. Users proposing new blocks usually put some of their coins on the line. The general rule is that the more is at stake, the better the chances of a user earning transaction fee rewards. However, when it is found that a user's block has inaccurate information, they can lose some of their stakes. This process is called slashing.
Which cryptocurrencies allow crypto staking?
On the one hand, staking isn't an option for all cryptocurrencies in the market. This consensus mechanism is only available for those using the proof of stake model. Many cryptocurrencies around use the proof-of-work model. However, this requires a lot of computing power. Thus, cryptocurrencies that use the proof-of-work model get criticized a lot because of environmental concerns.
Meanwhile, proof of stake doesn't require nearly as much energy. Thus, it's a more scalable option that can handle a more significant number of transactions.
Fortunately, a large number of popular cryptocurrencies now include staking. If a cryptocurrency is linked to a 'proof-of-stake' blockchain network, staking may be allowed.
It should be noted that staking works differently, depending on the blockchain network. Certain digital assets are more likely to be supported by the staking features of big cryptocurrency exchanges, making the staking process easier.
Coinbase, the biggest crypto exchange in the US, automatically turns on staking for users holding algo, the cryptocurrency of the Algorand blockchain, on its platform. As per Coinbase, users can earn a 4% annual yield through this process.
The biggest crypto exchange that supports staking is Ether or ETH. Ether is the native token of the Ethereum network and is considered the second-largest crypto asset in market capitalization. Other popular cryptocurrencies that support staking are Solana and Cardano.
As mentioned, not all cryptocurrencies support staking. The most popular and most valuable cryptocurrency, Bitcoin, uses the proof-of-work model for validating transactions. Some exchanges and financial firms offer their clients the option to lend their cryptocurrencies, allowing these participants to earn interest on Bitcoin and other digital assets without having to get involved in staking.
How do you start staking?
There are several ways you can start staking crypto, depending on your willingness to commit. First, you need to decide whether you're using your computer to validate transactions or if you want to delegate the task to someone to do the work for you.
Networks that support crypto staking usually allow people who own tokens to lend them to other users tasked with validating transactions. In turn, both parties share the staking rewards.
Through an exchange
The simplest way to start staking is through a crypto exchange. Some popular cryptocurrency exchanges take care of the staking work for their users in exchange for a commission. This method lets users monetize their crypto holdings instead of lying idle in their respective wallets.
In this approach, the exchange handles most of the administrative work for you, so you don't have to do much. However, this method isn't entirely risk-free. You risk trusting your coins to the exchange and node in question by staking through an exchange.
Some popular exchanges that offer stakes include Binance.US, Coinbase, and eToro. Others offer users a rewards program that allows them to earn rewards similar to staking.
Through a staking pool
If you're not willing to trust an exchange to make all the decisions on your behalf, you can explore another way through a staking pool. A staking pool is a tool that allows multiple stakeholders to combine their computing power to increase their chances of earning rewards. Staking pools are similar to mining pools in the way that individual users with others verify and validate transactions. By doing so, the pool has a higher chance of earning rewards.
To join the staking pools, you need to know how to use a crypto wallet because you must connect your tokens to the validator's pool. Before you join a pool, you must conduct some research to understand how they operate. It is recommended to inspect a pool operator's track record before joining.
Fortunately, some information is publicized to help you see whether a pool operator has disciplinary records. Some pools also have policies for protecting users that delegate their tokens to others. You should also check the fees or commissions you'll have to pay to calculate the possible rewards you can join if the pool is successful. Most staking pools have also been reviewed online, so you know what to expect from them.
It would be ideal for joining an established pool that has enjoyed some success. However, you shouldn't join the most significant pool because the rewards will be smaller. At the same time, blockchain networks are supposed to be decentralized.
By becoming a validator
One laborious yet rewarding way to staking crypto is by becoming a validator yourself. On the one hand, setting up your staking operation can be a complicated and costly process. It would help if you had the proper computing equipment and invested in software to do so. Plus, you will have to download a copy of the blockchain's entire transaction history.
In addition, becoming a validator has a very high-cost entry. You would need to invest tens of thousands of dollars to get started. Thus, investing through exchanges or pools is more practical and cost-effective.
What are the staking rewards?
The main reason why people stake their crypto is the possible rewards they can earn. What kind of rewards can you gain from staking?
Well, it depends. Staking rewards depends on the cryptocurrency, conditions (like the demand in the blockchain network you're staking in), and your method. Most cryptos adjust on a block-by-block basis, considering different factors.
These factors include how many coins the validator is staking, the duration the validator has been actively staking, the number of coins being staked on the network, and the inflation rate. Some networks have a fixed percentage for rewards.
These rewards are given to validators as a form of inflation compensation. Inflation encourages users to use their coins instead of holding them in their wallets. In turn, this may increase their usage as cryptocurrency.
The rates offered by exchanges can give you a general idea of what you can expect from staking. For example, Binance.US estimates that the annual rewards for staking are 4.5 to 6.5%. Meanwhile, Coinbase estimates a 4% yearly yield. Ether has a 4.5% annual yield.
While the rewards may not sound impressive, you earn from staking are still significantly higher than the amount you receive from your typical savings account. If you're staking a high amount, you have the chance to get a higher reward as well.
What are the advantages of crypto staking?
Why should you be putting money to earn rewards anyway? There are many benefits to stake cryptocurrency, especially now that more and more people are embracing the world of blockchain technology.
First, investing more coins through staking gives you the potential for high returns. Crypto investors gain a more significant percentage of crypto assets than people who put their funds in the bank. The general rule regarding staking coins is that the more staked assets you have, the bigger and more significant you can enjoy.
If you analyze the financial products in the market, you will see that crypto prices steadily rise. Hence, your staked crypto has a high chance of yielding good rewards.
Moreover, it is worth noting that proof of stake blockchains cannot world smoothly without your digital assets. You support the network and ensure your investment is in good hands through staking. As mentioned, a new crypto block can also be created by validating transactions on the network.
Aside from your digital asset and the process of joining a pool or exchange, you don't have to do much while staking. Most investors have to monitor price swings, but specific cryptocurrencies guarantee you can enjoy a certain amount after the specified lock-up periods.
Lastly, you don't need any equipment to start staking. You don't need to invest in expensive hardware or pay for costly electricity power to earn passive income. Others will handle processing transactions unless you've decided to become a validator.
What are the risks of crypto staking?
Staking crypto isn't entirely risk-free. While you don't have to do much aside from owning a particular digital asset, there are still risks you have to consider before venturing into this endeavor.
First, the price of certain cryptocurrencies is very volatile. You don't know what tomorrow might bring, so the money you invest into a specific cryptocurrency might not be worth much. Your assets rely heavily on the market and the value of the cryptocurrency you're staking.
Some cryptocurrencies have lock-up periods for staking. This means the rewards you enjoy do not depend on whether a new block is created or not. You won't get to spend the money you invest if the currency has a specified lock-in period. If you need money immediately, you won't get to liquidate your coins.
To be fair, you are initially notified of the lock-in period for staking. Hence, you'll be aware of how much time you don't have access to your coins. Because of this, it might not be a wise decision to stake all your money at the same time.
Lastly, entrusting your staking to an exchange means they'll have access to your digital assets. There's a security risk involved. While blockchain technology is highly secure, you can't be 100% sure that your assets are safe from people with malicious intent.
Should you join staking pools and stake crypto?
Staking crypto and joining a staking pool might not be for everyone. Before you venture into this endeavor, you must ask yourself a few questions.
First, do you think you need access to your staked assets? Crypto staking may require you to commit your digital assets for a particular period. At this time, you won't be able to sell or trade them with other users. If you think you might need to move your assets soon, staking might not be a viable option.
You also need to ask yourself if you believe in that crypto project. Your decision to explore staking ultimately depends on whether you think that cryptocurrency has a bright future or not. You have to remember that crypto is a very volatile asset. You have no control over its value. Your assets' value will suffer if the market plummets for one reason or another.
The staking rewards can be great, but at the same time, you also put yourself at risk of losing money when you stake crypto. As with everything, there are risks to investing your money. However, you don't have to do much regarding staking after placing your initial investment and possibly joining a staking pool.