Selling your investment at a higher price on the market is one approach to earn from cryptocurrencies.
Staking is another technique to generate money in crypto. Staking enables you to use your digital assets to generate passive income without having to sell them. Most likely, you have heard about staking in relation to the eagerly awaited Ethereum merging (more on that below).
Staking resembles putting money in a high-yield savings account in certain respects. Your deposits are lent out by banks, and you are paid interest on the amount of your account.
Staking and the bank deposit concept are similar in theory, although the comparison is limited. What you need to know about crypto staking is provided here.
Staking is the process of locking up cryptocurrency assets for a certain amount of time to maintain a blockchain’s operation. You gain extra cryptocurrency by staking your existing coin.
A proof of stake consensus technique is used by several blockchains. In this arrangement, network users must “stake” a certain amount of bitcoin in order to sustain the blockchain by confirming fresh transactions and creating fresh blocks.
Staking enables a blockchain to include only valid data and transactions. Participants agree to stake large amounts of bitcoin as an insurance policy in exchange for the chance to validate fresh transactions.
If they improperly validate flawed or fraudulent data, they may lose some or all of their stake as a penalty. But if they validate correct, legitimate transactions and data, they earn more crypto as a reward.
Popular cryptocurrencies Solana (SOL) and Ethereum (ETH) use staking as part of their consensus mechanisms. However, until recently, ETH also ran the energy-intensive proof of work consensus mechanism in parallel with staking. The merge means that Ethereum, from now on, will use the proof of stake consensus mechanism only.
Proof of Stake Validation
Staking is how proof of stake cryptocurrencies cultivate a functioning ecosystem on their networks. Typically, the bigger the stake, the greater chance validators get to add new blocks and earn rewards.
“In PoS, validators stake their assets as a skin-in-the-game, which gets slashed or destroyed if they behave maliciously,” says Gritt Trakulhoon, a lead crypto analyst for Titan, an investment platform. For example, trying to create a fraudulent block of transactions that didn’t happen.
As validators amass larger amounts of stake delegations from multiple holders, this acts as proof to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighted proportionally to the amount of stake the validator has attracted.
Plus, a stake doesn’t have to consist of just one person’s tokens. For example, a holder can participate in a staking pool, and stake pool operators can do all the heavy lifting in validating the transactions on the blockchain. Each blockchain has its set of rules for validators. For example, Ethereum requires each validator to hold at least 32 ETH. At the time of this writing, that’s about $US55,000. A staking pool allows you to collaborate with others and use less than that hefty amount to stake. But one thing to note is that these pools are typically built through third-party solutions.
How Does Staking Work?
If you own a cryptocurrency that uses a proof of stake blockchain, you are eligible to stake your tokens.
Staking locks up your assets to participate and help maintain the security of that network’s blockchain. In exchange for locking up your assets and participating in the network validation, validators receive rewards in that cryptocurrency known as staking rewards.
Many leading crypto exchanges, like Binance.US, Coinbase, and Kraken, offer staking rewards. “A more passive or novice user can just stake their cryptos directly on the exchange for slightly more convenience, in return for the exchange taking a portion of the staking yields,” says Trakulhoon. You can also set up a cryptocurrency wallet that supports staking.
“Each blockchain network typically has one to two official wallet apps that support staking. For example, Avalanche has the Avalanche wallet, and Cardano has Daedalus and Yoroi wallets,” Trakulhoon points out.
If you have your tokens in one of these wallets, you can delegate how much of your portfolio you want to put up for staking. You pick from different staking pools to find a validator. They combine your tokens with others to help your chances of generating blocks and receiving rewards.
What Are The Benefits of Staking Crypto?
Earn passive income. If you don’t plan on selling your cryptocurrency tokens in the immediate future, staking lets you earn passive income. Without staking, you would not have generated this income from your cryptocurrency investment.
Easy to get started. You can get started staking quickly with an exchange or crypto wallet. “It’s as easy as setting up a crypto wallet, loading it with cryptos, and clicking the ‘staking’ button on validators or staking pools within the wallet app,” says Trakulhoon.
Support crypto projects you like. “Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions,” says Tanim Rasul, chief operating officer and co-founder of National Digital Asset Exchange, a cryptocurrency trading platform in Canada.