what is staking in cryptocurrency?
Generally, when investors contemplate investing in cryptocurrency, they either think about mining crypto or purchasing it outright from a crypto exchange. But there is another way: crypto staking. So, this leaves many investors looking for – what is staking in cryptocurrency.
While staking may be a new addition to the financial lexicon, new crypto investors must understand this method.
Learning the stake is a step further toward becoming a well-learned investor. You can receive extra coins in your digital wallet through coin staking.
Staking is committing your crypto assets to support a blockchain network and to confirm transactions. It is available on cryptocurrencies that apply proof-of-stake methodology for processing payments.
This article will walk you through some basic questions about what it is, how it works, and where you can start staking.
So stick around till the end.
Staking in Cryptocurrency
Crypto staking involves locking up a certain amount of crypto holdings to earn interest or get rewards. Since transactions are verified in a blockchain, resulting data is stored on the blockchain. It is a way of validating transactions on a blockchain.
Since blockchain requires validators to verify a transaction to complete the recording process, validation depends on the method used by an exchange; proof-of-stake or proof-of-work. Both these methods support the network to achieve consensus or confirmation about the correctness of data.
However, the consensus requires participants, which is where staking comes in handy. Investors pledge a certain amount of cryptocurrency for staking purposes. From this pool of staking, validators are paid for their services. In contrast, stakers reward back with cryptocurrency.
For easy understanding, consider it as a cash-in-advance saving account. The depositor earns interest as a reward for holding his money with the bank, while the bank uses the same money for other purposes (like lending, etc.). So, staking coins is similar to earning interest.
How Staking Works
Staking is a passive source of income for investors. When an investor leaves his cryptocurrency on the digital wallet, the network uses those coins to forge new blocks on the blockchain.
However, only some investors’ holdings are used for staking, as the system automatically selects which account it wants to use for this purpose. Generally, the more crypto to hold up on your account, the better of chances of being selected.
Since investors’ holdings validate new blocks, the network rewards them.
- Crypto investors stake holdings by leaving them in their crypto wallet
- The network use holdings to forge new blocks on the blockchain
- Info is written in the new partnership, and investors’ holdings are used to validate it
- The network rewards back stakers for allowing their holdings to validate
Pros and Cons of Staking
Here are some advantages and disadvantages of crypto staking.
Pros
- Easy returns: Almost everyone can stake a small amount of cryptocurrency and yield rewards. It is straightforward to achieve as it does not require technical knowledge or hefty upfront investments.
- No special equipment is required: Anyone is eligible to become a validator; all you need is a regular computer.
- Energy-efficient: Unlike mining, where you need a constant supply of energy to keep your computer running all the time, you can validate transactions with a bare minimum amount of energy.
Cons
- Takeover potential: Users with most tokens mostly have a high say in a PoS framework. Therefore, small investors usually need to be more noticed. So, significant projects are generally taken over by more prominent investors or founders.
- Security concerns: There are security concerns around the PoS mechanism. In addition, leaving your cryptocurrency at the exchange is not viable as you may lose it to hacking or scamming.
- Centralization: In a few cases, validating is more expensive than mining. Further, the founders centralize validation power and leave other validators with minimum options.
Popular Crypto Staking Coins
A few years ago, the staking concept was outside the crypto framework, and users were not bothered about what is staking in cryptocurrency. Still, with the fastest cryptocurrencies like Ethereum, Tezos, and many more, the staking coins are no longer surprising.
Here are a few popular coins that are available for cryptocurrency.
- Ethereum
Ethereum (ETH) is one of the best cryptos for staking. However, you will require a minimum of 32 ETH to qualify for staking purposes. The reward system varies but generally offers a return rate on Ethereum staking is 5-17% per annum.
- EOS
EOS tokens are native coins of the EOS blockchain, and you can earn about a 3% per annum reward by staking them.
- Cosmos (ATOM)
Cosmos is known as the internet of blockchains; it is called interoperability. ATOM staking yields up to 21% per annum.
- Cardano (ADA)
ADA prides itself on using scientifically proven theories for development, while its stacking returns up to 4% per annum.
- Polkadot (DOT
Polkadot provides interoperability and is promising to support parachains. DOT’s staking returns about 15% per annum.
Frequently Asked Questions
How to stake cryptos?
You can stake cryptocurrency by the following five steps:
- Choose crypto or coin to stake
- Learn the minimum staking requirements
- Download the software wallet for the desired coin
- Figure out hardware requirements
- Begin staking
Where can I stake cryptocurrency?
You can stake cryptocurrency at the following platforms:
- Coinbase
- Kraken
- Stake Capital
- Staked
- container
Can I stake Bitcoin?
Since Bitcoin uses a proof-of-work mechanism that uses mining instead of staking for issuing new coins; thus you cannot stake Bitcoins.
Is crypto staking profitable?
Crypto staking is suitable for a passive income stream, as it does not offer high rewards. Returns on staking depend on the following:
- How big is the block reward is
- The size of the staking pool
- The amount of supply locked
Parting Thoughts
What is staking in cryptocurrency is a question bothering new crypto investors. It is a way to use crypto holding with an exchange to earn additional rewards. Staking has become one of the easiest ways of adding a passive lane of income.
When investors stake their coins, they allow holders to use their cryptos for validation. It opens up another income avenue, and one with low risk.
However, the return ratio on staking crypto could be more handsome, so if you intend to rack up your digital assets, then staking is not recommended. On the contrary, if you are good with low but confirmed returns, then staking is your game.
We are leaving you with the best of luck with staking cryptocurrency. Please share your staking experience in the comments section.