If you're a crypto investor, staking is a concept you'll hear about often. Staking is the way many cryptocurrencies verify their transactions, and it allows participants to earn rewards on their holdings.
But what is crypto staking? Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions.
It's available with cryptocurrencies that use the proof-of-stake model to process payments. This is a more energy-efficient alternative to the proof-of-work model, which requires mining devices that use computing power to solve mathematical equations.
Staking can be a great way to use your crypto to generate passive income, especially because some cryptocurrencies offer high interest rates for staking. Before you get started, it's important to fully understand how crypto staking works.
How staking in crypto works
With cryptocurrencies that use the proof-of-stake model, staking is how new transactions are added to the blockchain. Participants pledge their coins to the cryptocurrency protocol. From those participants, the protocol chooses validators to confirm blocks of transactions. The more coins you pledge, the more likely you are to be chosen.
Every time a block is added to the blockchain, new cryptocurrency coins are minted and distributed as staking rewards to that block's validator. The rewards are usually the same cryptocurrency that participants are staking, although some blockchains use a different type of cryptocurrency for rewards.
If you want to stake crypto, you need to own a cryptocurrency that uses the proof-of-stake model. Then you can choose the amount you want to stake. You can do this through many popular cryptocurrency exchanges.
Your coins are still in your possession when you stake them. You're essentially putting them to work, and you're free to unstake them later if you want to trade them. The unstaking process may not be immediate, and, with some cryptocurrencies, you're required to stake coins for a minimum amount of time.
Staking isn't an option with all types of cryptocurrency. Many cryptos use the proof-of-work model to add blocks to their blockchains. The problem with proof of work is that it requires considerable computing power. That has led to significant energy usage from cryptocurrencies that use proof of work. Bitcoin (CRYPTO:BTC) in particular has been criticized due to environmental concerns.
Proof of stake, on the other hand, doesn't require nearly as much energy. This also makes it a more scalable option that can handle greater numbers of transactions.
Benefits of staking crypto
Here are the benefits of staking crypto:
- It's an easy way to earn interest on your cryptocurrency holdings.
- You don't need any equipment for crypto staking like you would for crypto mining.
- You're helping to maintain the security and efficiency of the blockchain.
- It's more environmentally friendly than crypto mining.
The primary benefit of staking is that you earn more crypto, and interest rates can be very generous. In some cases, you can earn more than 10% or 20% per year. It's potentially a very profitable way to invest your money. And, the only thing you need is crypto that uses the proof-of-stake model.
Staking is also a way of supporting the blockchain of a cryptocurrency you're invested in. These cryptocurrencies rely on holders staking to verify transactions and keep everything running smoothly.
Risks of staking crypto
There are a few risks of staking crypto to know about:
- Crypto prices are volatile and can drop quickly. If your staked assets suffer a large price drop, that could outweigh any interest you earn on them.
- Staking can require that you lock up your coins for a minimum amount of time. During that period, you're unable to do anything with your staked assets, such as selling them.
- When you want to unstake your crypto, there may be an unstaking period of seven days or longer.
The biggest risk you face with crypto staking is that the price goes down. Keep this in mind if you find cryptocurrencies offering extremely high interest rates. Many smaller crypto projects do this to entice investors, but their prices often end up crashing. If you're interested in adding crypto to your portfolio, but you'd prefer less risk, you may want to opt for cryptocurrency stocks instead.
Although crypto that you stake is still yours, you need to unstake it before you can trade it again. It's important to find out if there's a minimum lockup period and how long the unstaking process takes so you don't get any unwelcome surprises.
When you should or shouldn't stake crypto
If you have crypto that you can stake and you aren't planning to trade it in the near future, then you should stake it. It doesn't require any work on your part, and you'll be earning more crypto.
What if you don't have any crypto you can stake yet? There are many that offer staking, but you should evaluate whether each cryptocurrency is a good investment first. It only makes sense to buy a crypto for staking if you also believe it's a good long-term investment.
Here are a few of the major cryptocurrencies you can stake:
- Ethereum (CRYPTO:ETH) was the first cryptocurrency with a programmable blockchain that developers can use to create apps. Ethereum started out using proof of work, but it's transitioning to a proof-of-stake model.
- Cardano (CRYPTO:ADA) is an eco-friendly cryptocurrency. It was founded on peer-reviewed research and developed through evidence-based methods.
- Polkadot (CRYPTO:DOT) is a protocol that allows different blockchains to connect and work with one another.
- Solana (CRYPTO:SOL) is a blockchain designed for scalability since it offers fast transactions with low fees.
Considering the returns you can make, it's worth researching these and other cryptos with staking.
The proof-of-stake model has been beneficial for both cryptocurrencies and crypto investors. Cryptocurrencies can use proof of stake to process large numbers of transactions at minimal costs. Crypto investors also get the opportunity to collect passive income from their holdings. Now that you know more about staking, you can start investigating cryptos that offer it.