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 original proof-of-work model. Proof of work 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 does staking work?
With cryptocurrencies that use the proof-of-stake model, staking is how new transactions are added to the blockchain.
First, 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 as a validator.
Every time a block is added to the blockchain, new cryptocurrency coins are minted and distributed as staking rewards to that block's validator. In most cases, the rewards are the same type of cryptocurrency that participants are staking. However, 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 those staked coins to work, and you're free to unstake them later if you want to trade them. The unstaking process may not be immediate; 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. It's only available with cryptocurrencies that use the proof-of-stake model.
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 (BTC -1.10%) in particular has been criticized over 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.
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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