What Is Staking?
Staking is just yet another aspect of crypto that might appear to be a bit complicated initially. Yes, it’s a bit confusing, but knowing the ins and outs can be highly beneficial for crypto investors.
Staking is similar to depositing your money in a financial institution, like a bank, in a fixed deposit or savings account. The bank uses your money for their business and gives you a fraction of their profit. You get a profit without risking your money, well sort of. Staking is more or less the same, although it functions differently.
What Is Staking In Cryptocurrency?
Staking works like putting money in a bank account. You gain interest from your money without risking it. When you deposit your money, there are rules provided by the bank that you must abide by. The same goes for cryptocurrency staking.
Blockchains themselves often use staking to give participants voting rights on what the blockchain will improve, this is a consensus mechanism called proof-of-stake. The first step for a user is to put the native cryptocurrency of that chain into the protocol. The protocol selects validators among those participants to verify blocks of transactions. It is more probable that you will be selected as a validator if you commit more coins.
As each block is added to the blockchain, it creates new coins and those are given to the block’s validator in the form of stake rewards. Most of the time, payouts are made in the same cryptocurrency that was staked; however, certain blockchains give out incentives in different coins.
If you wish to stake crypto, you must hold a supported cryptocurrency of the staking platform. After that, it’s up to you to decide how much money you’d like to put into play. When you stake your coins, you are still the owner of them, similarly to how your bank account is connected to your identity, a staked amount is connected to your wallet.
If you wish to exchange your staked coins, you can do so at any time without losing them. You won’t get your coins back immediately in all cases, since specific cryptocurrencies need you to stake them for a certain length of time before you can get them back. Similar to a depository account at a bank. But this locking period is often very clearly stated on the website you can stake on.
The majority of cryptocurrencies do not support staking. This feature is only available for cryptocurrencies that use staking mechanisms like PoS and have built a staking dashboard or use an external staking platform. Here’s an example of how this could look.
What Does Proof Of Stake (PoS) Mean?
Proof of Stake, a more recent consensus process, aims to improve speed and efficiency while decreasing transaction fees on a blockchain. It is less energy-intensive without requiring all the miners, which is one way Proof of stake helps save expenses for the protocol.
As a result of staking, blockchain transactions are verified by those who are invested in them. There are different methods to accomplish this, but the gist is that users put their tokens to work in return for the opportunity to add a block or a proposal to the blockchain.
Staking tokens ensure the validity of each new transaction they submit to the blockchain. When the network selects its validators, it does so based on the size and duration of each participant’s stake in the network.
In this way, those who put in the most significant time and effort get the prize. There are times when new block transactions are found invalid, resulting in what is known as a “slashing event” for the network. Which means somebody’s reward for supporting the network gets reduced.
What Cryptocurrencies Can You Stake?
As we have already mentioned, staking is not possible with all cryptocurrencies. It is only possible with currencies that have a staking dashboard or use a PoS mechanism. Here are some large market-cap cryptocurrencies that support staking:
- Ethereum (ETH)
- Solana (SOL)
- Luna (LUNA)
- Avalanche (AVAX)
- Polkadot (DOT)
- Bit Hotel Token (BTH)
Why Can't All Cryptocurrencies Be Staked?
Let’s explain why:
Managing a coin frequently lacks a central authority, which is why they’re known as decentralized. Without a central authority figure, computers use a consensus mechanism to solve problems.
There is a consensus process known as “Proof of Work” that is used by several cryptocurrencies, such as Bitcoin and Ethereum (until 2022). By proof of work, the network distributes problems to be solved among miners worldwide.
The miners compete to solve cryptographic puzzles, and the winner gets the reward in the form of cryptocurrencies. Proof of Work is a scalable method for a more straightforward blockchain like Bitcoin’s. A bottleneck could occur if Proof of Work is used for a more complex system like Ethereum, which includes a variety of programs running on top of the blockchain.
As a result, fees and transaction times may be prolonged. That’s why not all cryptocurrencies can use proof of work; hence they use PoS or proof of stake protocol which makes them suitable for staking.
Next to the PoS application there are also more centralized entities that allow users to stake cryptocurrency, these institutions often are more centralized and lend out the cryptocurrency to other users for interest, similar to a bank would. So that it can pay you your saving (staking) interest for depositing your crypto.
Advantages Of Staking
Crypto staking has lots of advantages. Since it’s relatively new, many are unaware of them. Here are some advantages of cryptocurrency staking:
- Easy profit on your existing cryptocurrency. You don’t have to put your cryptocurrencies at risk, although prices can be volatile.
- You won’t require any hardware or extra investment for crypto staking.
- By staking crypto, not only are you gaining profit, but also you are contributing to maintaining the security and efficiency of a blockchain.
- Greener than crypto mining. Mining requires a lot of energy; staking does not.
Disadvantages Of staking
Just like anything, staking has some downsides too. Here are the risks of cryptocurrency staking:
- Cryptocurrency prices change quickly. If you have a large amount of cryptocurrency staked and the price suddenly goes down, the expected return might not be able to compensate for the loss.
- Staking requires a specific period. During that period, you cannot use your coins even if you want to. If the price goes high, you might miss the chances to make a profit by selling them.
- Staking and unstaking can be bothersome on some protocols.
Conclusion
Cryptocurrency mining has been a lucrative hype for a long time, but staking is changing that. It’s a unique process equally beneficial for all parties while requiring much fewer assets. Like anything, staking has some pros and cons. But it’s safe to assume that staking is profitable for long-term investors if they diversify and don’t bite off more than they can chew.
There are many factors, like commissions, APY’s (interest-rate’s), track records such as changes to the APYs, etc., that you need to take into account before staking. Once you become a long-term player in this game, you will gradually learn what to do and what not to.
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