What is staking in crypto?
If you have ever explored how you can earn rewards from your crypto, you’ve probably heard of staking. Staking is the method used by certain cryptocurrencies for validating transactions. To earn rewards, you simply need to participate in this validation process. Perhaps this initial exploration has left you a little stumped as you’ve tried to figure out just how staking works, and how you can benefit from it.
An overview of ‘What is staking in crypto’
We get it - trying to master all of the knowledge that you need to make the best out of crypto, and NFTs can be pretty intense. There’s so much to learn, consume, and understand. That’s why we’ve started this article with an overview of ‘What is staking in crypto’. Here, we’ll give you the key facts that you need but, for the real detail, you’ll need to keep reading.
Cryptocurrencies that offer staking are providing a process where you are able to commit your digital assets. By committing these assets, you are supporting a blockchain and assisting with validating transactions. By participating, you have the opportunity to earn interest and your crypto wallets can be used as a way of earning a passive income. The interest rates offered can be more than just a little rewarding!
Currencies that offer staking are an alternative to those that follow the proof of work model. Proof of work involves the mining of cryptocurrencies and has seen criticism for the energy that is used in the process. The involvement of Elon Musk and Bitcoin highlighted that issue. Proof of stake has been shown to be more environmentally friendly than proof of work, and it has also proven itself as a way to make a respectable income.
All about staking coins
With cryptocurrencies that offer staking, rather than proof of work, this is the method that allows for the validating of transactions, and for them to be added to the blockchain. The process sees your assets working for you and can be done through your choice of crypto exchange. So, how does staking actually work? Let’s take a look:
Pledge your coins
The first step is to go to your crypto exchange of choice and then pledge your coins to the relevant protocol. You won’t be the only participant here as many other people will also be staking their coins. The protocol will choose from the participants and elect those who are able to take part in validating transactions. You’re more likely to be chosen if you pledge more coins.
The addition of every new block to the blockchain leads to new crypto being minted. These new blocks are then given as rewards to whoever was involved in validating the transactions. Generally, when you earn rewards, the rewards will be in the form of the crypto that you have pledged. That being said, there are times when you could be rewarded with another type.
Your coins are still yours
By staking coins, they remain yours. All that you are doing is putting them to work so that you can earn rewards from them. You are entirely free to withdraw your staked coins and trade them if you want to. There are some cryptocurrencies that have a minimum time that you need to stake for. Be sure to check this out before you pledge your coins. The time that your coins are retained is referred to as the lock-up period. This lock-up period may be a couple of months but, in some cases, it can run into years.
Staking - step by step
If staking still feels a little confusing, then that’s perfectly understandable. However, it is one of those things where, once you’ve been through it a couple of times, it suddenly seems incredibly simple. Not convinced? Let’s see if this step by step guide can help:
You can head over to any crypto exchange to do this, but you need to be sure that you are buying the right cryptocurrencies. As we have already seen, not all crypto offer staking. You need to be sure that the crypto you commit to adheres to the proof of stake consensus, rather than proof of work. A few of the major currencies that offer staking include:
It’s worth taking the time to learn a little more about these currencies so that you can be sure which ones you want to buy. You should look into how you earn rewards and what the rewards actually are. You also need to confirm the lock-up period that applies and be certain that you’re comfortable with this. Once you’re happy, it’s time to head over to the crypto exchange of your choice and buy.
It’s possible that the crypto exchange that you’ve used will have its own staking program. However, when that’s not the case, you’ll have to transfer your funds to a blockchain wallet. You have a choice between software and hardware wallets. The former is probably the quickest option. Regardless of the choice that you make, crypto wallets are known to be the best, and safest, way of storing cryptocurrency.
With your wallet set up, you’ll then need to deposit your funds. All that you need to do is select the type of crypto that you’ll be adding. You’ll then be given a wallet address. Copy and paste this and you can then transfer your funds from the crypto exchange and into your wallet.
You will find that most cryptos that offer staking do this through the use of staking pools. This means that you’ll need to join one. The pools are effectively a place where people combine their funds. This means that there is a bigger pot to work with and so more chances to earn rewards.
Like most things, not all staking pools are created equal. You’ll need to carry out some research to make sure that you’re joining one that is worthwhile. Here are a few of the things that you should look into:
- Check the reliability - If your staking pools server crashes you can’t earn interest or rewards. You can only earn during the uptime so make sure that your staking pool has a good track record with uptime at around the 100% mark
- Check the fees - As you earn rewards via a staking pool, you can expect them to take a cut. Anywhere between 2% and 5% is reasonable. If the fees are much higher than this, you should probably look elsewhere
- Consider the size - If you opt for a small staking pool, if you’re chosen for validating transactions, there will be fewer people to share the rewards with. However, with fewer people, there will be a smaller pool of combined funds and so it may take much longer for your pool to be chosen. A large pool has more chance of being selected, but any rewards will then be divided between many more people
Proof of stake vs proof of work
While there are other consensus mechanisms available, it is proof of stake that is widely regarded as being the most efficient. It does away with the environmental concerns that have been raised with Bitcoin and its proof of work mechanism. Whereas those who look at proof of work need expensive equipment for mining, there is no need for that with proof of stake.
The main attraction of cryptos that offer staking is the fact that there are opportunities to earn rewards. When you’re staking your coins, and are chosen for validating transactions, you get a share of those rewards.
The pros and cons of crypto staking
Some of the main plus points when looking at staking include:
- It’s an easy, hands-off, way to earn interest from your crypto and so create a passive income
- No need for any expensive equipment
- You play an important role in taking care of the blockchain in terms of its security and efficiency
- The impact on the environment is significantly less than that caused by crypto mining
Some points to be aware of are:
- If the value of your crypto falls, it could wipe out the value of your rewards
- The lock-up period could see you unable to access your coins for a long period of time