With the rising popularity of cryptocurrency, there are many ways to earn a passive income nowadays. One of the most common ways people tend to follow is by selling their investments when market prices rise significantly. Staking is one efficient technique to earn a handsome income without selling any of your investments. Crypto staking is a process of locking up or staking your crypto assets to a blockchain network for a set of periods to earn cryptocurrency rewards.
In crypto staking, the blockchains utilize the proof of stake method. It is a consensus mechanism that validates or verifies the blockchain transactions. The working of this method is completely different from the proof of work models employed by blockchain for mining cryptocurrencies. In this mechanism, the holders are allowed to participate and stake an amount of cryptocurrency to support the blockchain.
In return, the blockchain then chooses a holder by considering the size of their holding and the period they will be holding the stake. After the selection process, the participant can add the latest transaction data to the blockchain and earn cryptocurrency rewards in exchange. One of the major reasons why this mechanism asks the holders to stake an amount as collateral is to ensure that the holders stay genuine to the blockchain thus enhancing its security.
Crypto staking ensures that only legitimate and genuine transactions are added to the blockchain. If the holders try to validate fraudulent transactions and data, the network has the right to burn the holder’s stake and this process is known as a slashing event. The holder must also pay a hefty penalty if they are involved in minor breaches like being offline for a long period. Holders validating correctly can earn a good amount from staking in cryptocurrency. The rewards received from staking cryptocurrencies may vary among holders. In most cases, the validators receive the same amount as their crypto assets staked in the beginning. The staked cryptocurrency tends to increase over time if the blockchain platform becomes successful and popular in the cryptocurrency markets.
Difference between Proof-of-stake and Proof-of-work mechanisms?
Crypto enthusiasts often confuse proof of stake and proof of work. Both mechanisms are employed by blockchain networks to validate information and accelerate transactions. Even though both algorithms have proven beneficial to the blockchain networks, they come with different approaches.
According to the proof of stake mechanism, the block creators are known as validators. The validators maintain the entire functions of the blockchain networks. In the case of the proof of work mechanism, the miners block the blockchain networks and they have to solve cryptographic problems to verify the transactions. After solving the problems they would have to show proof of the correct answer to get the rewards.
The person needs to have enough coins or tokens to become a validator in the proof of stake blockchain network. In proof of work, the miners need to invest a lot in purchasing the accurate computing system and hardware for mining cryptocurrencies.
One of the major differences between the two is that the proof of work mechanisms is comparatively expensive considering the energy requirement and the highly sophisticated mining equipment. Under the proof of stake mechanism, the computing usage to validate and verify blockchain transactions is minimal, and thereby less energy and power is consumed for the whole staking process.
How does staking work in cryptocurrency?
It is important to remember that staking in cryptocurrencies is not as easy as many people might think. It is a complex process that requires profound knowledge and deep research in the cryptocurrency field. But once equipped with the required knowledge about staking, it is one of the best ways to generate an income from investing in cryptocurrency. Let us have step-by-step guidance towards crypto staking.
- Selecting a cryptocurrency: One important factor to keep in mind when choosing a cryptocurrency for staking is that not all types of cryptocurrencies can be utilized for this purpose. The main reason behind this is that not all blockchains support the proof of stake mechanism. The ones that use proof of stake mechanisms or similar models can be used for staking. Some of the most popular and profitable cryptocurrencies that can be used for staking include Ethereum, Luna, Solana, Cardano, Polkadot, and Avalanche, etc. The mechanisms and minimum requirements may vary in different types of cryptocurrency and the holder needs to be aware of these. They should also choose the cryptocurrency according to their earning potential.
- Acquiring the selected cryptocurrency: The second step involves acquiring the selected cryptocurrency to further proceed in the staking process. It is possible to purchase the cryptocurrency using any of the available crypto exchanges.
- Choosing an accurate staking platform: Selecting the appropriate platform for crypto staking is a crucial decision that needs to be taken carefully. The selected platform determines the type of staking and one’s entire staking process. Each platform comes with its own set of protocols that have to be followed by the holders.
- Staking your cryptocurrency: If the holder is ready with the right tokens in their cryptocurrency wallet and is ready to follow the given protocols of the selected platform, they can stake their crypto. They can stake their cryptocurrency to a blockchain for a set period.
- Earn rewards: The holders can collect their staked cryptocurrency that might have increased over time. The rewards may vary depending on the success of the platform. It is also important to note the fact that the rewards will not always be delivered at the right time. It may get delayed due to potential changes occurring in the protocols of the platforms or a slow network may down the process.
Different methods of staking
- Pool Staking: In cryptocurrency, pool staking enables the holders to pool or combine their crypto assets to increase their chances of being chosen to validate the next blockchain transaction and earn more rewards. The rewards received must be shared equally among the members of the pool. This method of staking can be followed by the holders to compete greatly in staking cryptocurrencies.
- Liquid Staking: Liquid staking is a new method introduced for staking cryptocurrencies. According to this approach, the holders receive a tokenized representation of their assets after they stake or lock their cryptocurrencies. These tokens can further be used or traded thus providing liquidity to the holders, unlike the traditional staking methods.
- Delegated Staking: in this type of staking, the stakers can delegate their staking power to a validator node which is operated by someone else. It is important to remember that the rewards gained should be distributed equally between the validator and the delegator. This method can be followed by the staker if they do not want to node by themselves. Delegating the stake to a validator will be better in most cases as it is less risky and requires no effort.
- Exchange Staking: There are staking exchanges that offer staking services thus enabling the crypto stakes to directly stake their holdings on these exchanges. These exchanges then perform the functions of staking the cryptocurrency on a blockchain network and then distribute the rewards equally to the participants. This method is commonly opted for by people for staking cryptocurrency.
Pros and Cons of Staking Cryptocurrency
Pros
- One of the best benefits of crypto staking is that it will provide a passive source of income to the users. The process of staking involves locking up your crypto assets for a set period. The staked amount might increase depending on the blockchain network and the amount you have staked in the beginning.
Hence it is always possible to earn income without even trading every time.
- Staking offers much higher return rates compared to the returns offered by traditional forms of investments in cryptocurrency. Some of the blockchain networks offer higher return rates than the average annual reward. This way staking becomes one of the favorable ways to increase your crypto assets.
- Unlike crypto mining, staking does not require any advanced technologies and hardware. The staking process is environmentally friendly and does not consume much energy as it utilizes minimal computing power to verify the transactions on the blockchain.
- Staking cryptocurrencies also functions without a central body governing the blockchain networks. So each of the participants can contribute certain changes to the networks and can directly become a part of forming the future of the blockchain network. The centralized system hence ensures that each participant is comfortable with the conditions and rules of operation. This accelerates the active and collective participation of the members in a blockchain network.
- Another advantage of staking operating within a decentralized body is that it reduces the risks of the blockchain network. In this system, participants have a role in maintaining the security of the network by contributing their assets. This contribution further stabilizes the blockchain network from any upcoming financial risks and security.
Cons
- The volatile nature of the cryptocurrency market is one of the challenges posed by the staking process. There are chances of the price of staked assets falling and this might cause a huge loss to the stakeholders. In such cases, the stakeholders will be left with an amount much less than the invested asset.
- The major function of crypto staking is to lock or stake your assets for a long period. Even though this practice offers certain benefits, the stakeholder will not be able to access the staked asset till the period is over. In such cases, the chances of missing out on investments and not reacting to market price fluctuations also become higher. The stakeholders should always choose a blockchain network based on their suitable block period.
- Most blockchain networks require the stakeholders to deposit a minimum amount before the staking process. For example, Ethereum is the most popular cryptocurrency used for staking. When a holder stakes in Ethereum, they would have to deposit 32 ETH to get the process started. Without depositing the minimum amount, staking cryptocurrency becomes a challenge. To avoid this minimum deposit, most of the users prefer pool staking.
- Staking in a blockchain network always involves challenges related to technical risks and the security of the network. Since staking functions within a decentralized body, the safety of the participants completely depends on the network they have chosen for staking cryptocurrencies.
- One another challenge faced by the stakeholders while staking is that there are cases when validators from some networks refuse to pay the investors. Some other blockchain networks take a long time to pay the crypto rewards. Such cases might cause huge losses to the investors.
- A successful staking experience might require the stakeholders to have a profound knowledge of the technical aspects and blockchain networks. The blockchain networking platforms may vary and the stakeholders need to have precise knowledge about all these before staking their crypto assets.
Things to consider while staking cryptocurrencies
- Be well aware of the technical elements and skills required for skating cryptocurrencies. Skating cryptocurrencies is not an easy task and certain risk factors are attached to this method in cryptocurrency. Skating requires good hardware and a stable internet connection and while staking the crypto staker must remain online. These are some of the most important factors to consider before staking.
- The stakeholders should always be aware of their stake or lockup period. This factor is crucial as it can have a major impact on the rewards received in the end.
- The stakeholders should be aware of the slashing event and penalties put forward if any minor mistakes like staking fraudulent transactions or being offline for a long time occur on their part. In case of invalid transactions, the blockchain network can burn the whole amount staked at the beginning causing the holder to lose everything that they invested.
- Some blockchain networks require a minimum amount to be deposited. The holders need to be aware of these factors before staking to the blockchain. One of the most effective ways to avoid this requirement is to choose the method of pool staking. Using this method, the holders can combine their assets and bypass the minimum deposit to the blockchain network.
- Beginners often overlook the tax implications that come along with the staking rewards. The regulatory laws and taxation of rewards may vary in different countries.
- A person should not completely rely on the income received from staking cryptocurrencies. It should be considered just as a way of supporting your regular income.
Can crypto staking be considered a good option for passive income?
Cryptocurrency is gaining immense importance in today’s world and slowly it has started overtaking the traditional investment methods. With the growing popularity of cryptocurrency, people are open to many more opportunities other than trading. Staking cryptocurrency is a method that has gained much fame in recent times and is sure to grow into one of the most effective methods of investing in cryptocurrency.
Staking cryptocurrencies can be considered one of the best ways to earn a passive income. Usually, when investing in cryptocurrency, the person has to be actively involved in the whole trading process to avoid any potential losses. However, in the case of staking, the stakeholder can stake their crypto asset for a set time and provide rewards that might have increased over time. In this method, the person does not have to contribute anything extra and receives double their invested crypto assets.
Compared to other methods like mining, the staking process does not require any extra expenses as the computing services are minimal and can be covered with less investment. Despite the risk of certain frauds and hacking, the staking networks are safer and the participants can depend on these networks by contributing their tokens or coins. The stakeholders should also be aware of certain risk factors associated with the staking cryptocurrencies like the lock-up period or the volatile nature of the cryptocurrency markets. They should also be aware of the challenges posed by blockchain networks to avoid losing any of their crypto assets.
Even though many cryptocurrencies can be utilized for staking, many reports show Ethereum to be one of the most popular choices for the staking process. Its transition to the proof of stake mechanism has made it a favorable choice among many investors. This variant of cryptocurrency offers both security and increases the chances of gaining profitable rewards in return. Considering the estimates for 2024, Ethereum has received a positive response from the crypto market and is expected to show significant growth.
In recent times, staking can be considered a viable and profitable investing option in cryptocurrency. The investment process involved in staking requires less effort and it is less expensive compared to other forms of investing. A person can benefit a lot from staking cryptocurrencies without actively participating in the process for the entire time. Staking is the best option for people looking for long-term investments in cryptocurrency. There are many reliable blockchain platforms available nowadays for staking cryptocurrencies. Each platform varies from each other in many factors and the person should have precise knowledge about the rules and conditions offered by each of them.