If you have been in the crypto space for a while now, you’ll know Ethereum has recently shifted to a proof-of-stake consensus algorithm from its previous proof-of-work one. The upgrade has reportedly cut down on the Ethereum blockchain’s energy usage by 99.95%.
Now, as a newcomer, you might be wondering “what is staking crypto on a proof-of-stake blockchain?”. Well, to put it simply, staking coins is basically locking a part of your crypto funds up on a PoS blockchain for rewards. In this post, we discuss crypto staking in detail, and go through the pros and cons of staking coins!
What is Staking in Crypto?
As mentioned before, on a proof-of-stake blockchain, you can lock up a certain amount of the native crypto for a specified period of time to participate in staking. When it comes to validating blocks on the chain, the candidate with the highest stake for the longest period of time is picked each round to act as a ‘validator’. The chosen validator is rewarded for their stake after the successful completion of every round.
Each proof-of-stake protocol requires you to lock up a specified minimum amount of the native crypto to qualify as a staker. Since that’s not exactly affordable to everyone, you can also become a ‘delegator’ for a proof-of-stake chain and offer your share of native coins to a chosen validator.
How Does Staking Work?
Proof-of-stake blockchains make validators (nodes from the blockchain network) work in place of intermediaries or payment processors to verify payments on a blockchain. There are staking pools in place where anyone can lock up their crypto funds. Coins like Tezos, Cosmos, and now even ETH allow staking, earning rewards over time to the holders.
The staking pool in which users are staking coins can be compared to an online savings account for better understanding of the process. When you stake your crypto funds, you become a part of the proof-of-stake blockchain of your choosing.
How to go About Staking Crypto?
There are multiple ways of staking coins, namely:
Staking solutions like P2P Validator and Stakin provide platforms for multiple contributors to pool their holdings together. By bringing together several stakers, these staking pools bring a better alternative to waiting until you have enough crypto saved up to participate in staking as a validator.
Crypto exchanges that offer staking are an effective solution for newcomers wanting to try their hand at staking. Some of the biggest crypto exchanges like Binance already bring crypto staking services to interested users.
What is Proof of Stake?
Proof of Stake (PoS) is a consensus mechanism some blockchain networks use as an alternative to Proof of Work (PoW). In a PoS system, instead of miners competing to solve complex mathematical problems to validate transactions and create new blocks, validators are chosen to create new blocks based on the amount of cryptocurrency they hold, or “stake,” in the network.
The more cryptocurrency a node stakes, the more likely they are to be chosen to create a new block and earn a reward as a validator. PoS is more energy-efficient than PoW as it doesn’t require miners to use powerful computers to solve complex problems. PoS can also make the network more decentralized as it doesn’t require much computational power to participate in the network.
Is Staking Coins Safe?
Crypto is a highly volatile asset class, and just like every other aspect of the crypto space, crypto staking also comes with its own share of downsides. Risks in staking coins include:
- The volatility of the crypto market is something you’ll have to be prepared to deal with when staking coins, as it may lead you to suffer impermanent losses.
- If there’s an attack on the staking pool or exchange you’re using, you stand at a risk of losing your funds.
However, despite the risks, the benefits of crypto staking is something that attracts crypto users. Make sure you’re staking only what you can afford to lose, and do careful research before choosing a platform to stake your crypto on.
How to Stake Crypto in 5 Steps
Step 1: Choose a Crypto or Coin to Stake
There are many cryptos that allow the option of staking; users have to choose from them on the basis of their preferred price levels, and also keep the volatility factor in mind. A lot of large crypto holders invest in ETH for staking purposes. While staking independently, you may also choose multiple crypto assets to diversify your reward-earning sources.
Step 2: Learn the Minimum Staking Requirements
The next step is learning the minimum amount of crypto holdings that need to be staked on your chosen blockchain to earn rewards. For example, ETH requires a minimum of 32 ETH to be held at once by a staker, which is a significantly large amount not many contributors can afford.
Step 3: Download the Specific Software Wallet for the Coin you Choose to Stake
Every crypto asset has a specific wallet that needs to be used to hold that coin for staking. When you choose to stake a coin, go to the relevant official website and download the software associated with it. Some coins allow other wallets to be used for the staking purpose as well.
Step 4: Decide Which Hardware to Use
Staking coins requires strong hardware support and a stable internet connection. So if you plan on staking crypto assets, choose the best available devices and get a high-speed wifi or Ethernet connection for the same.
Step 5: Begin Staking
Once you have gone through all these basic steps, you can start staking coins on your own terms. Some coins like Tezos also allow automatic staking by holding the coin in wallets like Coinbase.
For exchange-based staking, most of the work is done by the exchange, and users just need to hold the assets in their wallets.
Where to Stake Crypto?
Exchanges like Coinbase and Kraken offer staking services to their users; you can participate in staking by holding certain crypto assets in your wallet. The only thing you have to do is select ‘staking’ as an option on these platforms.
On the other hand, there are some platforms specifically dedicated to staking. They offer ‘staking as a service’ to investors. Staked, MyContainer, and StakeCapital, are some examples of such platforms.
Why do only Some Cryptocurrencies Have Staking?
PoS is a consensus mechanism based upon the act of staking, but there are blockchains like Bitcoin running on other consensus algorithms (PoW in Bitcoin’s case) that do not necessitate staking coins.
On a PoW chain, new blocks are added to the blockchain only after a complex mathematical equation is solved by a miner node and data is added to the block. There is no requirement for staking for such blockchains, since miners are in place to validate and add new blocks to the chain.
Therefore, on non-PoS chains, staking is not needed because it is not an integral part of the block validation process.
Is Crypto Staking Beneficial?
Crypto staking offers many benefits, namely:
- For long-term investors who do not plan to trade their holdings immediately, staking coins can turn out to be an option.
- Staking keeps your funds from collecting dust in your wallet and puts them to good use.
- It has similarities with your term deposits FD in the bank that keeps providing interest as long as it is held in the bank.
- Staking can be a potential source of passive income once you are knowledgeable regarding the validation process of PoS.
Keep in mind however that with staking, platform fees can change over time, and the market is ever-volatile. So again, stake only the funds you won’t need anytime soon.
Benefits of Staking Crypto
Pros of staking coins include:
- Staking coins can be taken as a way of making your idle crypto assets work for you and possibly earn you passive income.
- Staking usually rewards you with additional native tokens as rewards on the blockchain you choose.
- Staking means you’re contributing to block validation on a chain, and participating in keeping it secure and working smoothly.
- Sometimes, stakers are also provided governance benefits. This means that in all future changes and upgrades to the protocol, all stakers get a strong say as well.
Risks of Staking Crypto
Some cons to staking crypto would include:
- Again, the crypto market is unpredictable and highly volatile. Once you have locked funds up for staking, you may not be able to withdraw it or liquidate easily, not to mention, impermanent losses as a result of volatility.
- Since staking means locking up your assets for a specified amount of time, you essentially lose access to your holdings throughout the staking period.
- In the case of individual staking, there are high chances of errors in the validation process. Blockchains may penalize validators for any errors or missteps and ‘slash’ the value of their staked coins.
- When staking through an exchange, users are required to pay service fees. While the fees are not usually high, it can sting a lot in case the returns are not good.
Well, now we have learned the basics of “what is staking crypto?”. It can’t be denied that staking coins has both positives and negatives. Staking can prove to be incredibly beneficial for those who plan on holding certain currencies for a long time and have sufficient funds. However, for newcomers to the crypto space, it’d be a good idea to research thoroughly and consider the risk factors well before entering crypto staking.
Frequently Asked Questions (FAQs)
1. What is the Risk of Staking Crypto?
There are different risks associated with staking coins; the biggest one is the crypto market’s volatility. Your staked holdings cannot be pulled out as you wish or during a market instability. There’s also the risk of staking pools getting hacked, for investors stand to lose their staked funds in that case.
2. Can you Lose Crypto Through Staking?
You may lose crypto through staking in case:
- The market crashes and the staked coins lose value which is otherwise known as impermanent loss, or
- The staking pool or crypto exchange you are using gets hacked.
Therefore, it is better to be properly informed about staking coins before going forward with the step.
3. Is Staking Crypto Worth it?
It is fair to say many investors have earned through staking. Once you have done thorough research and staked the right coins, staking coins can be beneficial.
4. Can you Make Money by Staking Crypto?
This is a likely outcome for knowledgeable investors. Some of the long-term investors have already been earning good yield on their staked assets. Do keep in mind though that there are some significant risk factors to consider before participating in staking. The most important factor is DYOR (Do Your Own Research!)
Disclaimers: Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.
About the Author: Anuska is a sci-fi lover freshly exploring the blockchain and Web3 space. Her expertise lies in simplifying complex Web3-related concepts and topics for herself and others.
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Last Updated on November 22, 2023