Staking crypto is one of the most fashionable terms in the crypto world. It’s one of those phrases you must have heard about, even if you are not a Web3 enthusiast. Blockchain networks, Bitcoin (obviously), and decentralized finance have broken into the mainstream. While nearly everyone has heard phrases such as an interest rate or compound interest, a new terminology emerges that brings the promise of freedom and possibilities. Is crypto staking a real opportunity, or are those just deceptive promises? Learn about the staking mechanism!
What is staking crypto?
The process of crypto staking is pretty straightforward and easy to understand. To stake crypto means to lock crypto assets for a fixed period to support the operation of a blockchain. In return, you can expect to receive staking rewards.
Here comes another notion you must be familiar with, passive income. One of the most attractive perks for those who decide to stake crypto is the money you receive, thanks to your participation in the staking process.
Stake crypto – is it worth it?
Suppose you have purchased a particular amount of cryptocurrency you are not planning to spend. You can hold it and wait until its value increases. That’s all right. While the Web3 market can be highly volatile, cryptocurrencies have proven to bring exceptional investment returns for some backers.
With crypto staking, you give yourself a chance for even better profits. You not only benefit from the growth of the value of your currency over time; you can earn a solid few percent from a staking pool.
Crypto staking involves some risks
You don’t have to be a seasoned Web3 investor to agree with the following statement: the crypto market is risky. And staking crypto involves a lot of risks.
Staked assets usually have to be locked up for some time. During that time, you will not be able to trade your tokens, even if the digital asset you invested in your money rapidly loses its value.
Staked crypto is locked crypto. While this can keep you from futile actions (you won’t get rid of all your crypto holdings when their value is at the early phase of growth), it also exposes your crypto investments to additional threats.
Benefits and drawbacks of staking crypto
Before you decide if you want to earn interest with crypto staking, learn more about its pros and cons.
Drawbacks of crypto staking
- Limited rewards. While crypto staking allows you to earn passive income, the staking rewards are often limited. In the world of cryptocurrencies, the promise to receive an APY (annual percentage yield) of a few percent may not be attractive enough.
- Security risks. To start staking, you’ll need to entrust your crypto to an exchange, or another external entity that will stake it. This operation can be perceived as an additional threat to your digital assets.
- Market risks. While some staking mechanisms include lock-up periods, token holders are exposed to threats related to volatile market conditions.
Advantages of staking crypto
- Staking rewards – instead of keeping your crypto in a wallet and observing its value, make it work for you. Staked assets earn interests that have the potential to increase their value over time.
- Easy to start – staking crypto is easy and doesn’t require advanced technical knowledge. It boils down to choosing crypto to stack (you will learn more about this in a minute), setting up a crypto wallet, and selecting the right option in the staking app.
- Support the crypto ecosystem. Staking crypto reinforces blockchain. It’s also a way to support selected projects. If you want to back up a venture that you believe in, staking crypto may be an optimal solution!
How can you start staking
You already know the significant pros and cons of staking crypto. And what do you need to do to make staking work and earn profits?
1. Purchase cryptocurrency you can stake
Not all the cryptocurrencies out there support staking. You need to select one that uses proof of stake for validating transactions. Below you will find examples of crypto you can stake:
- Ethereum 2.0 (ETH) is one of the top cryptocurrencies that initially used proof of work. After ‘The Merge’, planned Q3/Q4 2022, Ethereum will use proof of stake to verify transactions. Therefore crypto investors will be able to stake this currency.
- Cardano (ADA) is a decentralized, eco-friendly cryptocurrency with proof of stake as its consensus mechanism. Cardano uses Ouroboros, which they call the first provably secure proof-of-stake protocol.
- Polkadot (DOT) is a decentralized protocol that allows different blockchains to connect and communicate with one another.
2. Transfer funds to your crypto wallet
Some crypto exchanges, for example Binance, offer their staking programs. This way, you can stake your cryptocurrencies directly via crypto exchange.
In other cases, you will need to transfer your funds to a crypto wallet. Some of those crypto wallets are:
- Coinbase Wallet,
- Ledger,
- Exodus.
3. Join a Staking pool
There are a variety of ways staking can work. For example, you must own 32 ETH to stake and independently become a validator. With the current ETH value, that’s over $50,000.
If you want to support consensus mechanisms of the proof of stake model and don’t have technical knowledge nor wish to engage extra computing power, the simplest way will be to join the staking pool. This solution is optimal for beginners and intermediates because you don’t have to engage those high crypto volumes.
Research available staking pools for the cryptocurrencies you own and join the one that is trustworthy and offers optimum conditions.
How does proof of stake work?
There are a variety of consensus mechanisms to validate transactions. The proof of stake model is utilized for processing blockchain transactions.
With this mechanism, the owners of cryptocurrencies stake their coins, giving them the right to validate new data that is added to the system. If the validation is correct – those who stake cryptocurrencies earn rewards. Conversely, the validator is punished if they submit insufficient data.
Proof of stake is a newer mechanism than proof of work and among its biggest advantages is that it doesn’t require significant computing power. In addition, cryptocurrencies that use proof of stake can be perceived as more environmentally friendly.
Summary of crucial information
While crypto staking comes with the promise of passive income you can obtain with staking a particular digital asset, it also has some limitations.
If you are a beginner who doesn’t want to dedicate high computational power and comprehensive money resources, you must use staking pools. Unfortunately, an average crypto investor is often doomed to limited profits that are a portion of the available rewards. On the other hand, staking is easy to start and offers an attractive way of baking endorsed crypto projects.
Is staking an attractive alternative to saving methods available in traditional banks? Decide if this way of generating yields is appropriate for you.
Resources:
https://www.forbes.com/advisor/investing/cryptocurrency/crypto-staking-basics/
