Cryptocurrencies are gaining huge popularity, increasing in number of crypto investors every day. Apart from buying and selling crypto tokens, the innovative mechanism of staking allows investors to earn rewards by staking their tokens. To learn more about crypto staking and its working mechanism, continue reading the article.
What is Crypto Staking?
Crypto staking is the process of staking crypto tokens in blockchain networks to earn rewards in return. This allows holders to ensure security and contribute to the smooth functioning of the network. By utilizing Proof of Stake (PoS) consensus, faster and more viable transactions can be enabled.
How Crypto Staking Benefits Holders?
Crypto staking offers numerous benefits to token holders and network participants.
- Passive Income
Staking crypto tokens allows holders to earn rewards in return. The higher the number of tokens straked the higher the rewards earned. The holder can make money by keeping the asset in hand, eliminating the need to sell the asset to earn income.
- Network Security
Crypto token staking prevents validators from doing malpractices and other scams within the network. This is because doing such things causes risk to the staked assets which can even lead to the loss of the staked tokens.
- Long Term Investment
Staking crypto tokens enables users to earn without selling their assets. Though short-term fluctuations tend to come and go, staking benefits holders in large durations. Instead of searching for the best time to buy and sell, a user can wait for the rewards to come, making the process more simple.
- Environment Friendly
Unlike Proof of Work consensus which requires large computational power to enable the mining process, staking is carried out using the Proof of Staking mechanism which requires less complex devices, reducing the requirement of power and creating less impact on the environment.
How Crypto Staking Works?
The proof of stake consensus mechanism allows token holders to participate in the validation of transactions by locking their assets in smart contracts. The validator who successfully adds a new block to the blockchain network is granted rewards, the higher the tokens staked the higher the chances to earn the rewards.
Staking protects the blockchain network from security threats as validators have to risk their locked assets if they do any dishonest or disloyal activities. The rewards are given randomly, however, factors like the number of coins staked and the remaining balances in the account, etc are considered. The validator who staked the highest number of tokens is rewarded the highest.
How to Stake Crypto?
Cryptocurrencies can be staked in different ways, either independently or using an intermediary. The different methods to stake cryptocurrency are;
1. Independent staking
Independent staking is one of the complex methods of staking that necessitates the need for understanding and being familiar with Linux/Unix commands. The steps involved in independent staking are;
- Buying The Hardware
For solo staking, a user has to buy the necessary hardware, mainly a compatible computer device.
- Install Software
To run the hardware and enable staking, certain software has to be installed, including consensus client, validator client, execution client, etc.
- Configure The Validator Node
Configure the files, set up the network, and produce cryptographic keys.
- Maintain The Validator Node
After configuration, the validator node has to be maintained. This includes software updates and troubleshooting detection.
2. Staking Using Crypto Exchange Platforms
- Create a Crypto Exchange Account
Create an account in any reliable crypto exchange platform by filling in the necessary information including name, email ID, etc.
- Verify The Account
Verify the account for enabling staking. Provide the required information and verify the account.
- Transfer Crypto Tokens
To stake, an account must have the necessary amount of crypto tokens. Transfer the tokens to the exchange platform wallets and select the staking option.
- Choose The Staking Amount
Choose how many tokens you want to stake and the staking period according to your choice.
- Confirm Staking
By agreeing to the conditions a user can stake the tokens in the blockchain network and earn rewards after completing the required reward period.
3. Staking using crypto wallets
- Choose a Crypto Wallet
Select a reliable and trusted crypto wallet for staking your cryptocurrency.
- Transfer Cryptocurrency
Transfer cryptocurrencies from an exchange platform or other crypto wallet to make the amount sufficient to enable staking.
- Choose The Staking Amount
Choose the staking option and select the amount of tokens you intend to stake and the period.
- Confirm Staking
After following the instructions, press ‘confirm stake’. The staked amount gets added to the blockchain and you will earn rewards after attaining the reward period.
Limitations of Crypto Staking
- Fluctuation in Asset Price
Crypto coins are highly volatile. The decline in the value of the coin can reduce the rate of rewards provided.
- Limited Currencies
Not all cryptocurrencies are available for staking, the limited availability of coins in staking limits the opportunity for users to stake.
- Lock Up Periods
Staking involves a lock-up period, during which users can neither transfer nor trade their assets. This prevents holders from selling their assets during a boon time.
Final Thoughts
Crypto staking allows users to stake their assets and in exchange earn rewards. It ensures the security of the network and enables users to interact with the platform honestly, preventing the chances of malpractices from the side of holders. Always be aware of the risk associated with staking before staking your assets in trading platforms.