What is the staking of cryptocurrencies? Staking is part of the mechanism for verifying transactions made by some cryptocurrencies- especially those operating on a “proof-of-stake” basis. Stakers can increase their crypto holdings by receiving so-called “rewards.” There are, of course, risks involved – which is why there are a few things to keep in mind.
Investors are increasingly interested in staking cryptocurrency and trying to capitalize on it. Cryptocurrencies are developing increasingly over the years and opening up more investment opportunities. Staking is a type of passive earning. Let’s look at this process in more detail in the article.
What is staking of cryptocurrencies and how does it work?
What is crypto staking? Let’s start with the basics: What is the staking of cryptocurrencies? Staking is part of the process that specific cryptocurrencies use to verify transactions. It is an essential part of a mechanism called proof-of-stake. In this process, people who already hold a particular share (stake) of a blockchain’s currency add transaction blocks to that blockchain. The blockchain is a memorable string of “transaction blocks.” This process is similar to mining used to add blocks to proof-of-work blockchains like Bitcoin. However, for proof-of-stake blockchains (such as Cardano), this process is called “forging” (or sometimes “minting”), and the people who perform the procedure are called validators or “forgers” instead of “miners.”
If you own a proof-of-stake cryptocurrency, you can earn coins in exchange for your stake, depending on the currency and how you “stake” your coins. Crypto staking also comes with certain risks, which we will discuss below.
How does staking work? Simply put, steaking works like an interest-bearing savings account. Coins of the respective currency are designed to place money in the savings account. They are designed to verify transactions. Users are rewarded for providing it.
Thus, staking is a way to make money more or less passively with cryptocurrencies . Therefore, in the financial field, this income is compared to a dividend paid on shares or interest on a savings account.
What is Proof-of-Stake?
So what exactly is proof-of-stake? Proof-of-stake is a consensus mechanism for processing transactions and creating new blocks on a blockchain. In the proof-of-stake system, validators process transactions and create new blocks on a blockchain, just as miners do in a proof-of-work blockchain (like Bitcoin). The difference is that in the proof-of-stake system, nodes (computers involved in building the blockchain) secure the right to create a block. They do this by setting aside (or “staking”) a certain number of their holdings, rather than competing to be the first to solve complex mathematical problems, as miners do.
The proof-of-stake algorithm uses factors such as how long the validator has held to select who will check the block next, the share, and how large the share is. Then it adds a bit of randomization. This requires much less computing power and electricity than the miners in the proof-of-stake system have to spend to earn the right to create a block by being the first to solve a complex math problem. For this reason, proof-of-stake is both a greener and more efficient process than proof-of-work and often results in transactions being validated more quickly.
The pros and cons of staking?
At first glance, cryptocurrency staking seems like a win-win. Users make their coins available to the network and get rewarded for it. At the same time, the corresponding network continues to operate.
Some of the biggest benefits of staking include the following:
- Passive income: Just as investors receive dividends as a “reward” for owning stocks, crypto investors can be rewarded for holding coins through staking.
- Network security: Staking is an integral part of running a crypto network. As a speaker, you contribute to its efficiency and safety.
- No hardware required: mining currency using proof-of-work algorithms requires mighty processing power, which is very expensive to acquire. On the other hand, with stacking, no additional equipment is required; all you need is your coins.
Depending on the coin and platform, you can also make very high profits. However, you also have to take a higher risk for it. Only cryptocurrencies that use the proof-of-stake algorithm can be bet. After significant updates in 2022, these include Ethereum (ETH), Cardano (ADA), Avalanche (AVAX), Cosmos (ATOM), Solana (SOL), Tezos (XTZ), and Fantom (FTM). But staking bitcoins is not possible because it uses a different blockchain technology.
Minuses of staking – lots of coins required: you generally need to provide many coins for betting. This increases the likelihood that the network will choose you as a validator. At the same time, your technology must be high quality and stable. If errors occur, you can be fined for this.
How does cryptocurrency staking work?
You can participate in staking coins in many ways without having to become a validator yourself. These include staking on a cryptocurrency exchange or participating in a staking pool. Staking on a cryptocurrency exchange means making your cryptocurrencies available through an exchange for use in a proof-of-stake process. Essentially, this allows owners to monetize their crypto holdings that would otherwise sit idle in their crypto wallet. With this approach, the exchange does a lot of the administrative work for you and picks a node for you to join, so you don’t have to do it yourself. However, this is not without risk – you take the risk of entrusting your coins to the exchange and the node in question.
Where to stake crypto? The best place to start staking is a cryptocurrency exchange. A cryptocurrency exchange should have a good rating. Before you start investing, you need to read reviews in more detail, see the services of the sale, and study the work of the platform.
Like a mining pool, a staking pool allows stakers to earn block rewards by sharing their resources. These pools follow a two-tier system, with an administrator overseeing the validators’ work and ensuring things run smoothly. If rewards are earned, they are split between the pool operator and the pool delegates. However, some pools charge additional entry and membership fees.
It is impossible to say in general terms at what best ways to stake crypto depends on the currency and platform chosen. In addition, even the highest staking rewards are insignificant if the platform goes bankrupt, as happened with FTX in the fall of 2022, and deposits still need to be secured.
For example: if you want to stack Ethereum, you need at least 32 ETH. Assuming a price of $1,100, you need to deposit at least $35,200 in capital. For other coins, the threshold is lower. Cardano (ADA) requires only a few coins, corresponding to a few US dollars at an exchange rate of 0.20 to 0.40 euros.
