When looking for the best legitimate ways to make money, cryptocurrency probably should hit your mind first. Cryptocurrency is arguably the fastest-growing digital asset and continues to attract lots of investors across the globe thanks to its high profitability rates. Backed by blockchain and enabled for trading, cryptocurrency guarantees numerous means for any potential investor looking to earn good money by trading online.
Other than the common methods of trading crypto coins, there are multiple ways to make money with cryptocurrency. And one of them is crypto staking. But what does staking in crypto mean? As experts in cryptocurrency trading, we are here to help you. So, today in this post, we are going to discuss in excruciating detail what staking in crypto is, its benefits as well as its associated risks. Peruse the article and enhance your knowledge.
So, what is staking in cryptocurrency?
In simple terms, staking in crypto involves holding crypto funds in a cryptocurrency wallet to support both the operations and security of a particular blockchain network. In other words, it is the act of locking crypto coins to receive rewards.
Technically, though, staking in crypto means refers to the practice of actively taking part in transaction validation on a proof-of-stake PoS blockchain. It is worth noting that on a blockchain network, anyone with a minimum required balance of a particular crypto coin has the power to validate trading transactions and earn staking profits or rewards.
So, how does staking in cryptocurrency work?
To fully understand how staking in crypto works, it is first important to know how Proof of Stake works. The PoS concept states that an authorized crypto trader can validate blockchain transactions depending on the number of crypto coins they hold. This simply implies that the more coins you own as a crypto trader at a particular blockchain network, the more mining power you have.
It is worth mentioning that was created as an alternative to POW, or Proof-of-work, which is the initial consensus algorithm used in blockchain technology to verify crypto trading transactions and add what is known as blocks to the chain.
Generally, POW needed lots of energy, with crypto coin miners being forced to sell their coins to essentially foot the bill. On the other hand, proof-of-stake gives crypto minors power based on the percentage of crypto coins they hold. It is often viewed as somewhat safer in terms of the potential for crypto minors to attack the blockchain network because it somehow structures compensation in a manner that makes attacks less rewarding for the miner.
Proof-of-stake was also developed to help address the problem of mining power. It is worth noting that mining cryptocurrency demands lots of computing energy to perform various cryptographic calculations to unlock the complex computational challenges. Consequently, the computing power equates to a high amount of power and electrical energy required for the proof-of-work.
To foot the energy bills associated with mining crypto coins, miners would usually sell their earned or awarded crypto coins to fiat currency, a practice that would result in a downward spiral in the value and price of the traded crypto coin.
The proof-of-stake seeks to address this problem by assigning mining power to the percentage of crypto coins held by a crypto coin miner. Through this technique, instead of using energy to find solutions to POW puzzles, a PoS crypto miner is limited to mining a proportion of transactions that reflects their stake ownership. For example, a crypto miner who owns five percent of the coins available can theoretically mine only five percent of the blocks.
The idea behind proof-of-stake is that participants can lock coins or their stake, and at certain intervals, the blockchain protocol randomly gives’ the right to one of the members to validate the next block. And as earlier mentioned, the probability of being selected is directly proportional to the number of crypto coins; the more coins locked up, the higher the chances.
Through this approach, what determines what participants create a block is not dependent on their ability to solve complex mathematical challenges as it is with POW. Rather, it is dependent on how many staking coins these participants are holding.
So, how does staking works in crypto?
Now that you know and understand what proof-of-stake means, you’ll find it fairly easy to understand who staking in cryptocurrency works. At the basic level, staking in crypto simply means locking your digital assets in a proof-of-stake blockchain network for a specified time.
And these locked crypto coin assets are used to achieve consensus, which is usually needed to secure the network to guarantee the validity of every new transaction to be reflected or written on the blockchain.
Participants who stake their cryptocurrency assets are known as validators. And for locking their coins and offering services to the blockchain network, these validators get rewarded with new crypto coins from the network. For a particular blockchain network to work efficiently, validators are needed to offer secure as well as stable services. Blockchain networks usually enforce this by reducing a validator’s stake for malicious conduct or dishonesty.
To successfully run a validator node, a participant should be committed to a selected blockchain network and operate a secure and continuously available infrastructure. It is important to mention that some blockchain networks have a relatively longer lockup period (the time when validators are not allowed to retrieve their crypto coins). There are also specific minimum thresholds for staking.
To evade dealing with these strict regulations, most crypto-asset owners choose to delegate their coins to a particular validator operating a valid staking pool. And a number of blockchain networks have built-in mechanisms that make it possible for participants who don’t want to become validators to simply delegate their coins to a validator on the same network. The chosen validator then conducts all the work and ultimately shares the rewards with their delegators.
So, how are staking rewards calculated?
It is important to note that every individual blockchain network boasts its own specific set of regulations for its participants. These rules describe both the financial and technical requirements needed to become a validator, the minimum staking amount, the algorithms of deciding which validators should perform an actual validating task as well as the principles guiding the reward distribution among the validators.
Even though every blockchain network may have a different way of determining staking rewards, most networks take into account common factors such as:
- The number of crypto coins a validator has staked.
- How long the validator has been actively staking.
- The total number of coins that are staked on the network.
- The current rate of inflation.
So, what is cold staking?
Cold staking is the practice of staking on a wallet that has no connection to the internet. This is usually conducted using a hardware wallet, even though it is also possible with an air-gapped software crypto wallet. Blockchain networks that support crypto cold staking allow crypto traders to stake while securely holding their coins offline. Cold staking is especially helpful for large crypto investors that want to ensure maximum protection of their tokens while supporting the blockchain network.
So, what is a staking pool?
This is a situation where a group of crypto coin holders merges their resources to boost their chances of validating blocks to receive substantial rewards. Simply put, they combine their staking potential and subsequently share the rewards proportionally to their pool contributions.
It is imperative to note that staking pools are arguably the most difficult to trade on and requires lots of expertise. They are effective on blockchain networks where the entry barriers are fairly high. However, they can be profitable and offer additional flexibility for individual crypto stakers.
So, what are the benefits of staking in crypto?
One of the main benefits of staking crypto coins is that it eliminates the need for routinely buying expensive hardware and consuming lots of energy. The system also offers guaranteed returns as well as a predictable source of passive income as opposed to its proof-of-work system counterpart, where traders or participants are rewarded via a mathematical procedure with fairly low profitability of paying out.
So, what are the risks associated with staking in cryptocurrency?
Despite its potential benefits, staking isn’t free from a few drawbacks. Market risk is arguably the biggest risk that crypto traders will face when staking. As you already know, the crypto market is a highly volatile one and there is always a chance the market will experience an adverse price movement in the specific asset you are staking.
It is also worth noting that a significant number of crypto staking assets come with fixed locked periods where participants can’t access their staked assets. If the value of the staked coin decreases significantly, it will ultimately affect your overall staking returns. Staking crypto coins that don’t feature a lockup period would be a perfect way to mitigate this type of risk.
Also, like any other type of cryptocurrency trading, there is always a risk that you can lose your wallet’s private keys, or that your tokens will get stolen if you are not careful with your security measures. This is why it is always important to backup your wallet and keep your private keys in a private and secure location. It is also highly recommended that you stake using platforms that allow you to have custody of your private key as opposed to using third-party custodial staking apps.
The Bottom line:
Staking in cryptocurrency is available to nearly every aspiring crypto investor looking to take part in the consensus as well as governance of blockchain networks. It is a pretty simple and straightforward way to earn some passive income by simply holding crypto coins in a crypto wallet.
However, it may have some risks and this means you have to thorough research to make sure you know and understand all the pros and cons of being a crypto staker!