Crypto staking can help you earn interest and build passive income.
If you’re involved in the cryptocurrency market, crypto staking is a popular topic that comes up often. Like many concepts in crypto, staking can be simple or complicated depending on how deep you want to go.
Our goal is to make staking as accessible as possible so that everyone can get involved. In this article, you’ll learn how crypto staking works, the benefits it has to offer, and how to get started.
What Is Crypto Staking?
At its most basic, crypto staking is the process of holding funds in a cryptocurrency wallet in order to support the operations of a blockchain network.
When you stake your crypto, you’re committing them to a certain blockchain network. The project then uses your funds to validate transactions on the network.
As an incentive for staking, you’ll receive a reward for letting the blockchain network use your funds — typically, some percentage of the total value of the crypto you staked.
For example, you may choose to stake Cosmos (ATOM) on a certain staking platform. As a result, the platform offers you an annual return on your staked funds.
This makes crypto staking an easy way to use your holdings to generate passive income. And, because certain cryptocurrencies offer high interest rates for staking, you can build wealth without having to rely on trading to make a profit.
How Does Crypto Staking Work?
The easiest way to understand how staking works is to compare it to a more conventional financial product: the certificate of deposit (CD).
When you deposit your fiat currency (e.g., dollars) in a certificate of deposit, you agree not to withdraw the money for a set period of time.
In return, you receive interest on the total value of the currency in the CD during the deposit period (e.g., three months, six months, 12 months, or 18 months). All banks vary in the interest rates they offer, but most will provide higher rates of return for longer deposit periods.
So, if you leave your money in the CD for 24 months, you’ll receive a better interest rate than you would if you only leave your money in the CD for six months. Crypto staking works in a similar manner, only without the long deposit periods.
In fact, some staking platforms offer both flexible and locked staking products. With flexible staking, there is no lock-up period other than the time it takes to “unstake” the staked funds.
Locked staking typically comes in many different durations, from a few days to a seven- or 30-day lockup period — or longer.
However, unlike the CD that most conventional banks offer, not all cryptocurrencies can be staked. It’s only available for tokens that use the proof-of-stake model of payment processing rather than the proof-of-work model.
The Proof-of-Work Model
The proof-of-work model (PoW) was the original verification method pioneered by the Bitcoin blockchain.
Under this model, users validated transactions by solving complex cryptographic problems and adding blocks to the chain. Those who did so were rewarded for their work with coins of the blockchain on which they were working. This became known as mining.
In the first few years of the blockchain, users only needed a basic home computer to get involved in the PoW model. But as mining competition increased for the world’s most popular PoW cryptocurrencies, the process required more computing power to mine a single token.
To mine major cryptocurrencies these days, you need an extremely powerful, customized computer that might cost thousands or even hundreds of thousands of dollars to build and operate.
The Proof-of-Stake Model
Like the proof-of-work model, proof of stake (PoS) is a consensus mechanism — a way for a blockchain to validate transactions and verify that a user owns the coins or tokens they claim.
In the proof-of-stake model, users who are invested in the blockchain validate the transactions. Your staked tokens act as a guarantee of the legitimacy of any new transactions you add to the blockchain.
When you stake your crypto on a platform, the platform can then pool your funds together with others into large blocks to prove their stake in the blockchain and validate trading transactions.
Doing so allows the platform to earn additional rewards from the blockchain network, which are then passed on to users (typically in the form of interest, calculated in terms of annual percentage yield [APY] on the total amount you’ve staked).
These rewards would have been out of reach if you tried to validate the transactions on your own, due to either the technical requirements, time, or costs involved.
It’s important to understand that not all platforms will offer staking for all proof-of-stake cryptos. That’s why it’s essential to do your research before choosing the platform you’re going to use.
Benefits of Staking Crypto
Before we dive into the benefits of crypto staking, it’s important to discuss the risks.
Crypto prices may be volatile. If your assets experience a large price drop while they’re staked, it could cancel out any potential rewards, including earned interest.
Additionally, staking may require locking up your assets for a set time. In the case of locked staking, you may have to wait for the lockup period to end before you can access your funds.
Finally, some smaller crypto projects offer high rates to entice investors, but their prices then fall, erasing any earned interest.
With all of that said, when managed correctly, the rewards of crypto staking can offset the risks and help you build real crypto wealth. Let’s take a look.
1) Earn Interest on Your Cryptocurrency
The biggest benefit of crypto staking is that you can earn interest and other rewards from your funds on deposit.
Many newcomers to the cryptocurrency market get involved in staking for this reason alone — it’s a quick way to earn passive income while investigating or diversifying into other strategies, including ones that involve trading.
2) Better for the Environment
Mining crypto can be an energy-intensive endeavor that has a negative impact on the environment (e.g., electricity use, heat production, carbon emissions, etc.).
This is especially true for some of the larger cryptos, such as Bitcoin and Ethereum. Crypto staking, on the other hand, uses less energy and is more environmentally friendly than mining.
3) Voting Rights
Depending on how the verification mechanism works in a specific blockchain, crypto staking might reward you with additional voting rights and the ability to participate more fully in the direction of the blockchain project.
Crypto Staking Tips
1) Develop a Strategy
Flying blind in the cryptocurrency market is seldom a good idea. It doesn’t matter if you’re day trading, HODLing, range trading, or dollar-cost averaging. If you don’t have a strategy, the market can quickly get away from you.
The same is true for crypto staking — without a strategy, you can quickly end up in a position you don’t want to be in.
Develop a strategy before you do anything else. Think about details such as:
How much you want to stake
How long you want to stake
The benefits you hope to achieve (e.g., passive income, voting rights, etc.)
The types of returns you want to get (e.g., fixed or variable)
The minimum interest rate you’ll accept
No two people will share the same strategy, so establish a plan that works for you.
2) Prepare a Wallet
A crypto wallet allows users to store, access, and manage their crypto funds. Wallets fall into two categories: hot wallets and cold wallets.
Hot wallets are those that online cryptocurrency exchanges offer to their customers. Cold wallets are those that store cryptocurrency offline (e.g., an external hard drive).
Staking crypto is generally available to anyone who wants to participate and who has the funds. You can even do it on your own if you have the right technical knowledge and computer hardware.
But the vast majority of users will be better served by contributing their crypto to a staking pool via a platform such as Binance.US.
When you open a wallet with a crypto exchange, you can start earning rewards without having to operate your own validator hardware or go through a long, complicated process to get started.
3) Select the Crypto That’s Right for You
As we mentioned earlier, no two people will share the same strategy for crypto staking, nor will they always choose the same cryptocurrency.
You have to do what’s right for you. So, while your friend may choose Binance (BNB), you may feel more comfortable with Solana (SOL).
4) Check the Minimum Staking Requirements
The minimum staking requirements will change from platform to platform and blockchain project to blockchain project.
Be sure to check those requirements before jumping in so you have the funds available to stake the coin of your choosing.
5) Diversify
One of the best ways to protect yourself from becoming overexposed to the peaks and valleys of the cryptocurrency market is to diversify your portfolio.
Though you may commit a large percentage of your fund to crypto staking in a single coin, you can safeguard your position by staking crypto in other coins or by getting involved in a different part of the market entirely (e.g., buying, selling, or trading).
6) Take Your Time
The principle that doing something too quickly leads to mistakes certainly applies to crypto staking. Don’t rush into a situation just because others are heading that way.
Similarly, resist the urge to buy and stake unproven cryptocurrencies you’ve seen hyped on social media. Some people use this method to inflate a coin’s value, sell what they’ve got at high prices, and then disappear when the value crashes.
HT: https://blog.binance.us/crypto-staking/
