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.
How to stake crypto
Staking cryptocurrency may seem a little confusing the first time around, but it's a simple process once you get the hang of it. Here's how to stake crypto step by step:
1. Buy a cryptocurrency that uses proof of stake.
As previously noted, not all cryptocurrencies offer staking. You need a cryptocurrency that validates transactions with proof of stake. Here are a few of the major cryptocurrencies you can stake and a little bit about each one:
- Ethereum (ETH +0.58%) 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 (ADA -1.31%) is an eco-friendly cryptocurrency. It was founded on peer-reviewed research and developed through evidence-based methods.
- Polkadot (DOT -1.10%) is a protocol that allows different blockchains to connect and work with one another.
- Solana (SOL -0.63%) is a blockchain designed for scalability since it offers fast transactions with low fees.
Start by learning more about any proof-of-stake cryptos that catch your eye, including how they work, their staking rewards, and the staking process with each one. Next, you can look for the crypto you want and buy it on cryptocurrency apps and exchanges.
2. Transfer your crypto to a blockchain wallet.
After you buy your crypto, it will be available in the exchange where you purchased it. Some exchanges have their own staking programs with select cryptocurrencies. If that's the case, you can just stake crypto directly on the exchange.
Otherwise, you'll need to move your funds to a blockchain wallet, also known as a crypto wallet. Wallets are considered the best way to safely store cryptocurrency. The fastest option here is to download a free software wallet, but there are also hardware wallets available for purchase.
When you have your wallet, choose the option to deposit crypto and then select the type of cryptocurrency you're depositing. This will generate a wallet address. Go to your exchange account and choose the option to withdraw your crypto. Copy and paste that wallet address to transfer your crypto from your exchange account to your wallet.
3. Join a staking pool.
While staking can work differently depending on the cryptocurrency, most use staking pools. Crypto traders combine their funds in these staking pools to have a better chance of earning staking rewards.
Research the staking pools available for the cryptocurrency you have. There are a few things to look for here:
- Reliability: You don't earn rewards while your staking pool's servers are down. Pick one that has an uptime as close to 100% as possible.
- Reasonable fees: Most staking pools take a small cut of the staking rewards as a fee. Reasonable amounts depend on the cryptocurrency, but 2% to 5% is common.
- Size: Smaller pools are less likely to be chosen to validate blocks but offer larger rewards when they are chosen since they don't need to divide rewards as much. You don't want a pool that's too small and could potentially fail. On the other hand, some cryptos limit the amount of rewards a pool can earn, so the largest pools can become oversaturated. For most investors, mid-size pools are best.
Once you've found a pool, stake your crypto to it through your wallet. That's all you need to do, and you'll start earning rewards.
What is proof of stake?
Proof of stake in crypto is a consensus mechanism -- a way for a blockchain to validate transactions. The nodes in a blockchain must be in agreement on the present state of the blockchain and which transactions are valid.
There are different consensus mechanisms that cryptocurrencies use. Proof of stake is one of the most popular for its efficiency and because participants can earn rewards on the crypto they stake.
Staking rewards are an incentive that blockchains provide to participants. Each blockchain has a set amount of crypto rewards for validating a block of transactions. When you stake crypto and you're chosen to validate transactions, you receive those crypto rewards.
When you should or shouldn't stake crypto
If you have crypto 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? Considering the returns you can make, it's worth researching cryptos with staking. There are many that offer this, but make sure to evaluate whether each cryptocurrency is a good investment. It only makes sense to buy a crypto for staking if you also believe it's a good long-term investment.
Passive Income
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.
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