Cryptocurrency

What Is Crypto Staking?

Cryptocurrency investment is a booming business, and owning digital assets is becoming a trend. To own more digital assets, you need more crypto coins. Cryptocurrency coins’ prices have been rapidly increasing that they’re already tantamount to gold. Imagine a coin costing around $30,000. Expensive as it is, growing coins can break the bank. There is, however, a way to let your coins grow instead of just letting them sit idly in your account. 

Crypto staking is a method of gaining rewards by staking your coins. The notion is similar to putting your money in a bank. The bank will use your money for other means to grow it, such as loans and bonds. Then in return, you’ll get a portion of the profit, which you see as interest in your account. Staking your coins works the same way, although the backend mechanisms are completely different. Staking is one way to make your coins profitable without selling them. However, staking is not for every coin. 

Not all coins are created equal and can be staked. Staking can only be done on a blockchain that implements the Proof-of-Stake consensus mechanism.

What Is Proof-of-Stake?

Proof-of-Stake is a consensus mechanism used by certain blockchains to select validators, process transactions, and add new blocks to the blockchain. Therefore, it consumes less power and is more energy efficient than Proof-of-Work. In Proof-of-Work, miners race up to solve a complex mathematical problem, and whoever resolves the problem first will be granted the right to create or add a block to the blockchain. This requires high computing power and a high-end system to get that chance to become a validator. In Proof-of-Stake, no solving of mathematical problems is involved. Participants, or “stakers”, simply have to stake their digital assets to lock up the coins, but a minimum amount of coins is required to participate in running the blockchain. In fact, the process doesn’t end here. It is just the start.

How Staking Works

The validator will be selected randomly from the pool of “stakers”. Certain factors are considered in selecting the validator, such as the length of time the coins have been staked and the number of coins that have been staked. The selected validator then creates a block and adds it to a blockchain, which other validators will validate. The validator will then receive rewards for processing a transaction or adding a block. Conversely, if the validator added a fraudulent block, the validator would lose some coins or lose the whole amount that was staked. This keeps the network secured since there is a lesser chance that validators will be dishonest in their dealings, knowing that rewards or losing their coins are at stake.

Proof-of-Stake is simpler and leaves a greener impact than Proof-of-Work. BNB, Cardano, Solana, and Polkadot are just some cryptocurrencies that use the Proof-of-Stake mechanism. Ethereum is also making a switch and is currently transitioning from Proof-of-Work to Proof-of-Stake.

Staking Methods

If you don’t want to do the hard work, there are other means to stake your coins without setting yourself up as the validator. One way is to stake your coins through cryptocurrency exchange. This way, the exchange will do most of the work for you, such as finding a node to join. However, they will normally deduct a percentage from your earned rewards as a commission fee. 

Another way to stake is by joining a staking pool. Just like in cryptocurrency exchange, there is an administrator that oversees the validators. When a pool earns a reward, it is split between the pool operator and pool delegators. Some pools also charge a membership fee.

If you have the expertise, enough resources, and time to invest, you can also work your way to become a validator and have the rewards in full.

Benefits

Crypto staking is indeed a rewarding (no pun intended) way to make your coins profitable. One benefit of crypto staking is the high value of rewards. Successful validation usually has approximately 11% return, ten-fold what you usually get when you deposit your money in a savings account. The worth of staked coins goes up as the prices of coins increase, and we have recently seen spikes in coin prices. This means that your returns will have a much higher value. 

Another benefit of staking is its simplicity. Proof-of-Stake has a much simpler mechanism than Proof-of-Work, which makes it favorable to those who do not have expensive rigs to do mining. This benefits the “stakers” and the environment since Proof-of-Stake consumes less energy than Proof-of-Work. In fact, one can stake by just using a smartphone or a low-end laptop. 

Staking is also an efficient way to boost the network’s safety and security since validators would strive for honesty and trust to add valid blocks to the blockchain. Otherwise, they will lose the rewards and even their staked coins.

Drawbacks

While the benefits of staking make it attractive, it also has drawbacks that one should consider. In staking, coins are locked in until the end of the staking period. “Stakers” also tend to stake their coins for longer periods to get the chance to be selected as a validator. You’re, therefore, prohibited from using your coins for something else during the lock-in period. 

When you stake, you’re also taking the risk of diminishing returns brought about by the volatility of the crypto market. There is a possibility that the returns you’ll receive are much lower than what you’ve invested. 

Another drawback is the possibility of losing your coins when the staking administrator is not doing a good job or when the network is hacked. 

Conclusion

Crypto staking is a good way to keep crypto coins active and profitable without doing much work. It also does not require intensive knowledge or expensive computer systems for one to get started. Crypto staking offers many benefits but also has a few drawbacks that one should consider before venturing into it. One should also note that not all coins are eligible for staking. So, before getting started, it’s important to check that the coins belong to a blockchain that supports the Proof-of-Stake mechanism.

About the author

Glynis Navarrete