Benefits of staking crypto
Here are the benefits of cryptocurrency staking:
- 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 understand:
- 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 staking reward rates.
For example, many smaller crypto projects offer high rates to entice investors, but their prices then 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.
Why not all cryptocurrencies have staking
Cryptocurrencies need to use the proof-of-stake consensus mechanism to have staking. There are many that don't, and these cryptos can't be staked.
Proof of stake isn't the first or only consensus mechanism that cryptocurrencies can use. Proof of work was the first, since it originated with Bitcoin. Other early cryptocurrencies followed in its footsteps until Peercoin (CRYPTO:PPC) introduced proof of stake in 2012.
There's debate over which consensus mechanism is the more secure option. Although the computational power required by proof of work uses substantial energy, it also makes proof-of-work blockchains difficult to attack. Some cryptocurrencies choose proof of work for this reason.
Another, less common consensus mechanism is proof of burn, where miners must burn (destroy) crypto to validate transactions. No option is perfect, and cryptocurrency developers choose the one they like most for their specific projects.
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