What Is Crypto Staking & How Does It Work?

If you have invested in cryptocurrency or your friend has, you would have come across the term – Staking. Of all the articles we have done so far, I would rate this in the top three in terms of usefulness. In this article, we will discuss What is Crypto Staking, and it will help you earn more with your cryptocurrency investment. Let us start with the topic.

Also Read: What are the different types of blockchains | What is Atomic Swaps & It’s Advantage

What is Crypto Staking?

What Is Crypto Staking

You have excess cash with you, and you know you will not be spending it in the near future – what do you do? You put the extra money in the bank. Why? So you can earn interest on the amount you have deposited. Staking is more or less the same – you deposit your coins for interest.

In staking, you commit your cryptocurrency to support a blockchain network and confirm transactions. In return, you get interest on your investment.

How does staking work?

Some cryptocurrencies use the proof-of-stake model. For such crypto, a new transaction needs to be validated before it gets added to the blockchain. To support the network, you pledge your coins to the cryptocurrency protocol. 

Many investors pledged their coins. The protocol picks an investor to confirm the new block of transactions. The more crypto coins you have pledged, and the higher the duration of your staking, the higher the chances of you getting chosen for validation. In some cases, there may be a minimum threshold amount required to stake. If you don’t meet the criteria, you can use a staking pool. It is similar to the mining pool we discussed in great detail.

Your coin is still in your possession when you stake it, and you are free to unstake it at a later stage. However, you cannot unstake your coins as and when you need them. Some cryptocurrencies require you to stake them for a certain period.

Which coins can be staked?

You cannot stake all coins, but most can. The good news is that you can Stake seven of the ten most popular crypto coins. Some of the popular coins you can Stake are Ethereum, Cardano, Solana, Polkadot, etc.

Why should I stake my coins?

There are many benefits of staking, and if your coin support it, you should consider staking your coin for the below reasons – 

Earn additional token – When you stake and get picked as a validator, you earn an additional coin. It increases your overall stake. However, there is no guarantee that you will get a new coin when you stake it. However, you still earn interest on your invested amount. You can earn interest somewhere between 10 and 20 percent. There are very few investment options that can give you such kinds of returns.

Less resource-intensive – We have discussed mining and how much energy it consumes. Compared to it, staking needs far fewer resources. As a crypto family member, you service the ecosystem by making tokens rarer. 

Security – You play a significant role in maintaining the efficiency and security of the blockchain by staking your coins.

Risk of staking:

Every investment type comes with a risk, and so does staking. Hence, before you decide to Stake your coins, you should understand the risks.

Lockin period – When you stake coins, you need to lock in your funds for a specific time. The minimum staking period could be months or even years in some cases. During this time, you remain the owner, but you won’t have access to them.

Crypto volatility – You already know crypto is volatile in nature. In months, the prices can come down 30 to 40 percent. It can rise by the same percent. When you stake your coins, even when the coin price goes down, you cannot do anything about it as your investment is locked.

Fees – There are fees associated with staking. You should know the fees you will have to pay in the process as it varies from exchange to exchange. 

Unstaking period – Even when you unstake your coin, it is not available to sell immediately. In most cases, there is an unstaking period of seven or more days.

Should you do staking?

If you plan to stay invested in your coin for years and don’t plan to trade it in the near future, you should consider staking your crypto coins to earn interest and rewards from them. You will also get on the validation and governance side of blockchain networks which may interest many investors.

Now that you know another way of earning from your crypto investment, it is time you start investing in crypto coins.

Leave a Comment