The emergence of blockchains and cryptocurrencies has brought many undeniable benefits to users worldwide. A significant benefit is the opportunity to earn profit through mining or taking advantage of market price volatility to buy and sell tokens. Another often obscure way to make money from blockchains is staking, a process that involves putting your digital assets to work to earn income passively. It is the unique cryptocurrency equivalent of fixed-income assets in the traditional financial scene.
This article will dive into crypto staking, exploring what it is, how you can stake tokens, the benefits and risks, and more.
Staking is a way to passively earn rewards on proof-of-stake (POS) blockchains by locking up cryptocurrency assets to participate in validating transactions. Instead of relying on the intense mining mechanism in the proof-of-work network like Bitcoin, POS blockchains choose validators to create new blocks and verify transactions on its system.
Validators are entities and individuals that decide to lock their digital assets for a set period to support the operation of a blockchain and enhance its security. And in return for their role, these validators will earn staking rewards. This process is similar to the high-yield savings system of traditional banking – you save your cash and get a return over time. In the cryptocurrency blockchain world, you stake your digital assets and lock them up as collateral to be put to work for profit.
Now, how exactly does crypto staking work? Before we go into that, it’s important to note that this process works only for blockchains with proof-of-stake consensus mechanisms like Ethereum and Solana. The way staking works in POS networks is simple – interested asset holders lock up their eligible assets for a specific period to be selected as validators. One validator is chosen randomly and assigned to propose a new block and update the blockchain ledger.
All the other validators will review the block and validate transactions with the nodes, which will continuously cross-check each other. In return, all validators get a staking reward for their role. However, if an error, mistake, or fraudulent activity gets spotted during the proof of stake process, the node will receive a penalty like loss of rewards or slashing.
You should also note that most proof of stake protocols usually require a relatively high minimum amount of tokens from validating participants. For example, the Ethereum network typically requires 32 ETH to be considered for validation. And the more assets you stake, the higher the likelihood of being selected as a validator. Overall, the staking process ensures accountability and accuracy and helps maintain security and efficiency in the blockchain network.
As mentioned, most blockchains and their digital currencies typically require many tokens for validations. This can be a significant stumbling block for people who can’t afford the requirement. To address this challenge, staking today takes many forms, with proof-of-stake and delegated proof-of-stake being the two general categories.
Proof-of-stake (POS), also known as solo staking, involves individuals and entities with stake crypto holding chosen as validators to validate transactions on the blockchain. Each validator has its nodes and stake assets to receive rewards.
Delegated proof of stake (DPOS) involves many coin holders delegating their staking power to other individuals or entities with validation nodes, known as delegates. These delegates then stake the assets, and any reward earned is shared amongst everyone. A significant benefit of this method is that it allows holders with tokens less than the requirement to participate.
Besides these two, other types of staking include:
The staking rewards digital asset holders can earn vary and often depend on many factors, from the exchange platform to the tokens, lockup periods, and more. However, the exact calculation is usually calculated in APY (Annual Percentage Yield) and can be between 5 and 20%.
Several factors typically affect the rewards asset holders can enjoy when participating in validation operations. Major ones include:
Unlike mining, the exciting thing about staking is that anyone can do it. In fact, many crypto exchanges offer staking opportunities to their users, making things easier. Due to this, it’s pretty easy to get started with cryptocurrency staking. While the process tends to vary slightly across different projects, here are the general steps you must follow to get started.
From Coinbase to Binance, Lido, Kraken, and more, there are many major exchanges where users can participate in staking today. So, the first and most crucial step in getting started is choosing a reputable and licensed exchange platform to join. Assess your preferred options to ensure they fit your needs regarding security, yield rates, eligible tokens, etc.
The next step to take is to decide which token to stake. You can assess the eligible tokens for staking on your chosen exchange and choose the one that suits your investment needs. Besides the token, you should also consider the terms your chosen staking platform offers. Some terms are rigid and require that the stake assets stay locked for a specified duration, while others are flexible and allow users to unstake at any time. Once ready, go to your chosen exchange’s staking section and stake the desired tokens.
Instead of staking with exchanges, you can look into other options, like participating in a staking pool or utilizing dedicated staking crypto wallet platforms. This typically helps diversify and potentially increase the income reward. And if you are not interested in staking, you can consider alternatives like DeFi lending that return rewards on stablecoins like Tether.
As you might have already inferred, staking has several benefits that participating asset investors can enjoy. Let’s explore these advantages.
The primary advantage of the staking process is its passive profit-earning potential. By holding and staking your tokens, you can earn passive income rewards for participating in the blockchain operations. This results in an avenue for revenue generation for crypto investors without selling their digital assets.
Another noteworthy benefit of cryptocurrency staking is the enhancement of network security and stability. In the proof of stake system, the art of staking makes malicious attacks on the network difficult to execute. The more coins are staked, the more secure the blockchain network becomes. Other notable benefits of staking your crypto include:
While cryptocurrency staking offers a wide range of advantages to digital asset holders, it has its fair share of challenges and risks. Perhaps the biggest challenge is the complexity of the act. Staking crypto, especially the solo and service options, requires a fair amount of technical knowledge and expertise from users. This can be a significant deterrent for many people.
Every budding investor needs to know that there are certain risks associated with staking. Let’s explore a few of these risks you must understand before staking
Due to the decentralized nature of the blockchain and its cryptocurrencies, the legal and regulatory landscape of staking is constantly evolving. Also, there are varying regulatory standards surrounding staking on crypto exchange platforms across different jurisdictions and countries. This can have a significant impact on staking operations and returns.
One of the most significant risks of staking crypto is the market price volatility. Prices of cryptocurrency tokens are often experiencing big swings in value. A substantial drop in the value of any staked asset can offset any reward gained from participating in validation or even result in a net loss. For example, if you earn a 20% staking reward for locking up your asset and find the currency drop 50%, you will incur a substantial loss.
Liquidity and lockup periods are another significant area of risks associated with crypto staking. Liquidity is a hallmark of cryptocurrency that indicates that the asset can be easily bought or sold. However, investors are often subjected to a lockup period when staking with some digital tokens on some platforms. This is the minimum time the asset will stay locked and inaccessible to the holder. You won't be able to unstake and sell the token during this time. Also, if you stake smaller or new crypto assets with little liquidity, you may find it hard to find markets to sell or convert your staking reward into other currencies.
Staking platforms, wallets, and digital currencies are not entirely immune to hacking and attacks from malicious individuals. So, there’s also always the risk of losing your funds when security gets compromised. This is why it’s essential to utilize major staking platforms that are reputable and trusted in the market and have top-notch security measures.
As mentioned, there are many platforms out there offering staking service. However, not every one of them is trustworthy, as there are also insecure and fraudulent entities. So, it’s essential to be cautious when choosing where to stake digital currencies online, as the wrong choice can result in loss of rewards and funds.
Besides volatility and liquidity, there are also risks involved in the day-to-day operations of staking on blockchain networks. A significant potential risk in this area can arise from errors on the side of the validator node. If a staking validator node doesn’t function properly or makes a mistake, this can result in a penalty that typically reduces the return yields. And in some worst cases, the staked cryptocurrency could get “slashed,” reducing the tokens invested.
There’s no denying that the concept of staking can be pretty challenging to grasp, especially for beginners. As such, many tend to make some basic mistakes when getting started.
Here are some of these mistakes that you must avoid making:
An important detail that every beginner in the staking scene must understand is that while many digital assets are eligible for staking, not all of them are worthwhile. Some of the most common eligible digital currencies include:
As mentioned, the choice of platform can have a far-reaching impact on a crypto user’s experience when staking their assets. So, it’s essential to consider a wide range of factors when deciding where to stake assets to find the best fit. Let’s check out some of these crucial considerations.
One of the most crucial criteria to consider before choosing where to stake is the platform’s reputation. You want a trustworthy platform that has a solid track record on the market. This way, you can stake with no fear of scams or fraud.
Due to the nature of our digital age, security has become a necessity in every industry, and the area of staking is no exception. So, it’s crucial that you only consider platforms that prioritize security and feature robust measures like two-factor authentication, cold storage, and multi-signature wallets, among others.
Another important criterion you should consider when choosing where to stake is regulatory compliance. Although cryptocurrency is decentralized, each jurisdiction has sets of standards surrounding staking and trading on exchange platforms. You want a staking platform that complies with all the relevant regulations within your jurisdictions. This way, you can avoid any potential complications that may arise.
Staking holds solid promise in the digital world. After all, it offers a way for asset holders to easily earn passive income through rewards by participating in the validation of the blockchain network. And as more users and investors get involved in staking, the more decentralized the networks will become. These will, in turn, improve the level of security on the networks, making them more tamper-proof and unhackable. We also expect continued improvement in staking rewards with evolving mechanism governance for newer and better models and voting structures. As the world of staking evolves, it will also become more inclusive and offer newer and better opportunities for more users.
Cryptocurrency staking offers a unique way for enthusiasts to use their asset holdings to generate passive income. It is a crucial process in proof-of-stake blockchains that uses staked assets to validate transactions, improve security, promote new coin circulation, and return rewards to participants. The art of staking is becoming popular thanks to major exchanges like Binance, Coinbase, Kraken, Lido, and others, offering the service to digital asset holders and making it accessible to everyone. However, it’s essential to know that staking has its fair share of challenges and risks, such as market volatility, liquidity, lockup periods, etc.
Whether or not you should stake your digital asset holdings depends on your investment needs and goals. If you are looking to generate profit on a long-term basis and are not bothered by locking up your assets and short-term price fluctuations, staking is an ideal option for you. However, it’s not a good choice if you want short-term gains or need your tokens to be fluid.
Yes, staking can be a worthwhile and profitable venture for asset holders. However, whether or not you will be profitable depends on several factors, asset volatility being the primary one.
Yes, there are risks involved in staking that can result in losing your digital asset. This can happen due to price volatility, regulatory changes, validator platform errors, hacking by malicious individuals, and more.
Staking can be an excellent long-term investment for crypto asset holders, especially for those who strongly believe in the future of the underlying cryptocurrency. However, to do this long-term, you must also be willing to accept all the staking risks.
How much yield rewards you can earn from staking varies depending on the validator platform used. It also depends on relevant factors like staking period, network activity and performance, token supply, and competition.