The domain of crypto itself is quite complicated and difficult to understand for many experienced tech professionals. Among the many confusing elements in the crypto space, staking is also a complicated topic when you dive deeper into it. In the most basic sense, staking crypto offers a crucial approach for earning rewards through holding specific cryptocurrencies. However, staking is much more than just the simple definition outlined here.
With the recent upsurge in demand for decentralized finance or DeFi, people are interested in discovering the significance of cryptocurrency staking in driving the growth of a completely new assortment of crypto assets. The following discussion offers you a detailed introductory guide on staking cryptocurrency and how it works. In addition, the discussion would also reflect on the advantages and risks associated with cryptocurrency staking alongside an outline of the best cryptocurrencies for staking.
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The Popularity of Crypto Staking
Before diving into an understanding of cryptocurrency staking, it is reasonable to wonder about the question ‘is staking crypto worth it’. As a matter of fact, crypto staking has witnessed a prolific rise in recent times with occasional surges in the number of users staking cryptocurrency for earning yield farming rewards or fixed interest. Furthermore, the number of miners associated with PoW or proof-of-work blockchain networks has started to reduce drastically.
As a matter of fact, major exchanges such as Coinbase and Binance providing staking services to users could achieve APYs as high as 30%. Therefore, it is quite clear that such exchanges hold massive quantities of staked cryptocurrencies. As of September 2021, the total worth of assets staked on Binance Smart Chain amounts to more than $6.1 billion. Furthermore, the total value of assets staked in DeFi protocols or the TVL (total value locked) amounts to more than $86.59 billion. Therefore, you can clearly notice a formidable growth in the demand for staking cryptocurrency, which drives many discussions around staking.
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What is Crypto Staking?
Now that you know about the necessity of cryptocurrency staking, you would obviously wonder about ‘what does staking crypto mean’. The best way to find the answer to this question reflects on the definition of cryptocurrency staking. It is a process in which users would lock their funds in a cryptocurrency wallet for participating in the maintenance of operations on a Proof-of-Stake or PoS-based blockchain network. You can find some similarities between staking and crypto mining as both of them help in achieving consensus. At the same time, both staking and mining involve rewards for participating users. Staking crypto is almost the same as depositing money in a bank for earning ‘interest’ or the rewards for deposits.
From a technical perspective, users would delegate a specific number of tokens to the governance model of a blockchain, thereby taking the tokens out of circulation for a specific period of time. The protocol of the specific blockchain network locks up the investor’s holdings, just like the money deposited in a bank. The assets of the investor locked in the protocol offer many prolific benefits to the network. First of all, staking cryptocurrency could increase the value of tokens due to the limited supply. Furthermore, staking also enable the use of tokens for blockchain governance with networks using the Proof-of-Stake consensus mechanism.
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Difference between Staking and Mining
With a clear impression of ‘what does staking crypto mean’, you could most likely wonder about the uniqueness of staking. How is it different from the process of mining used for validating and verifying transactions before adding them to the blockchain? The primary difference between staking and mining crypto largely focuses on the underlying blockchain consensus mechanism used for validating transactions. Mining is common in the case of Proof-of-Work or PoW consensus mechanism, noted prominently in Bitcoin. On the other hand, staking is ideal for blockchain networks with Proof-of-Stake or PoS consensus mechanisms, like in the case of Ethereum 2.0. Let us take a look at the following differences between mining and staking crypto prior to an understanding of how staking works.
- In the case of mining, miners have to solve some complicated mathematical puzzles. On the other hand, staking involves nodes in the network engaging in the validation of new blocks through locking up their assets.
- The first miner who solves a mathematical puzzle gets the privilege of adding a block to the blockchain through mining. However, nodes ensure the validation of a new block by locking up their native tokens in a smart contract.
- Mining focuses on the need for specialized mining hardware such as GPU, capable of consuming massive amounts of energy. On the contrary, staking cryptocurrency presents a more environment-friendly alternative with more than 99% energy savings.
- Another critical difference between mining and staking is the requirement of higher computational power or work in mining. Higher computing power or resources in mining could increase the chances of solving complicated mathematical puzzles for adding blocks to the network and receiving rewards. However, staking crypto actually focuses on the number of native tokens staked or the stored value as an important factor for selection as a validator for the network. Users with the highest number of native tokens are more likely to take on the role of validating new blocks in staking.
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Working of Staking
The next important factor in understanding ‘what does staking crypto mean’ would take you to its working. The process of staking begins with purchasing a specific amount of tokens in a blockchain network. At the same time, you should also note that staking is possible only with blockchain networks that support Proof-of-Stake of PoS protocols. Once you have purchased the native tokens of the network, you have to lock them in the protocol with a procedure suggested by developers of the network. Generally, you can find a plausible answer to ‘is staking crypto worth it’ by reflecting on the simplicity of staking transactions. All you have to do is follow the wallet’s instructions for carrying out a staking transaction.
Furthermore, you could also find the features like staking pools on cryptocurrency exchanges as flexible instruments for conducting staking transactions. Such types of features focus on increasing the number of rewards through crypto staking in a particular network. How? The process helps in increasing the number of coins locked in as stakes in the network at a specific instance of time. Generally, nodes with the highest number of staked coins would get more transactions for validation. The ranking of nodes in staking would thereby depend on the number of tokens held by each node. So, nodes which have more tokens are more likely to earn a better rewards. This is one of the reasons for which staking pools have gained considerable levels of popularity in recent times.
Users could also choose another approach for staking cryptocurrency with the fixed staking approach. The fixed staking process involves users staking tokens for a specific period. In addition, certain providers also offer more flexible approaches with flexible staking, which allows users to withdraw their tokens at any specific point. However, the rigid conditions with fixed staking generally lead to higher interest rates while flexible staking offers less attractive returns.
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Advantages and Risks of Staking Cryptocurrencies
With a clear impression of ‘what is staking crypto’, the differences between staking and mining, and the working of cryptocurrency staking, let us move to the next step in understanding crypto staking. You need to know the value benefits introduced by staking in the world of crypto. At the same time, you should also have a clear impression of the risks posed by crypto staking in order to make proper decisions before staking.
Benefits of Crypto Staking
You can find the most reasonable clarification for ‘is staking crypto worth it’ by identifying the benefits of crypto staking.
The foremost advantage of crypto staking is the opportunity for earning more crypto in comparison to mining. You can discover some of the most generous interest rates with crypto staking ranging up to 10% or 20% annually. It also presents a conclusively profitable approach for investing crypto assets for better returns.
The next crucial advantage of staking cryptocurrency reflects the resource-effective nature of the process. Users do not need any expensive equipment for staking crypto. If you have a blockchain protocol that supports the proof-of-stake model and it offers native tokens, then you can participate in staking.
Limited Environmental Impact
Staking could also present a better case for crypto adoption with a limited environmental footprint. With the considerable reduction in energy consumption and the use of computational resources, staking offers an environment-friendly alternative to crypto mining.
Participation in the Network
Most important of all, staking crypto also defines a unique role of users in the governance and security of underlying blockchain networks. Users get the privilege of verifying and adding blocks of transactions to a blockchain network. Therefore, you would have a crucial role in maintaining the performance and security of the underlying blockchain network of the cryptocurrency.
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Risks of Staking Cryptocurrencies
You can develop a true impression of staking in the world of crypto only by taking a look at the other side. Staking cryptocurrencies also has certain disadvantages that users should be careful of.
High Price Volatility
One of the biggest risks associated with staking cryptocurrencies is the high volatility of crypto prices. As a result, you can run the risks of huge losses in event of price drops in staked assets. In such cases, the price drop could surpass any amount of interest earned on the assets.
Staking also demands locking in the crypto assets for a specific amount of time. You could not do anything with the staked assets during the period of time for which assets are locked in staking.
Loss of Control
In addition, another prominent risk in staking crypto emerges from unstaking. When you want to unstake crypto assets for trading them again, you have to wait for a minimum lockup period. The lockup period could be seven days or more and in some cases, the whole unstaking process might take longer. So, you would have to wait for using your own assets thereby reducing a certain level of your control.
Another formidable risk in the case of staking cryptocurrencies is directly evident in the addition of fees. If you choose exchanges for staking, then you would have to pay a certain fee for staking. At the same time, the fees would vary considerably from exchange to exchange and generally amount to a specific share of the staking rewards.
Know about the Suitable Crypto for Staking
Another significant element in discussions surrounding the staking of cryptocurrencies revolves largely around the suitable staking coins. It is important to note that you cannot stake every cryptocurrency. Here is an outline of the best staking crypto coins.
The frontrunner in the staking crypto phenomenon, Ethereum, switched to PoS recently. In order to start staking Ethereum, you would need at least 32 ETH for becoming a validator. Subsequently, you could get the authority for data storage, transaction processing, and addition of new blocks to the blockchain.
Investors could also find Cardano as another viable alternative in the best staking crypto coins. Users could delegate the native token of Cardano i.e. Ada to staking pools for earning rewards. At the same time, users could also establish their own staking pools with the technical skills and knowledge required for creating and administrating the staking pools.
Solana is also another promising candidate among the best staking crypto alternatives. Investors could stake the SOL token of the Solana network or delegate it to the stake pool. However, investors need to use digital wallets supporting SOL tokens for delegating it to a staking pool. The most interesting factor about Solana as crypto staking alternative is the simplicity of its approach. It only focuses on the selection of validators and the number of tokens that investors would want to stake.
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Factors for Selecting a Staking Platform
The distinctly evident opportunities with staking definitely provide clear answers for ‘is staking crypto worth it’. You have popular coins supporting staking and the value of higher returns on crypto assets with staking. Therefore, many would be quick to stake their coins in the first platform they find for staking cryptocurrencies. However, the selection of a staking platform is an equally important aspect as earning rewards in the case of staking. The slightest fault in your selection could lead to zero rewards and in some cases, loss of staked crypto assets. You can rely on the following factors to find out a suitable platform for staking cryptocurrency.
- The choice of a staking platform should not depend on the word of the developer or the founder team. You need to check out the reviews of the protocol on platforms such as Twitter and Reddit. Generally, technical users could spot possibilities of a rug pull on DeFi platforms and provide notifications about any vulnerabilities or foul play in the code.
- Try to go with reputed platforms such as Cool Wallet or Maker for staking crypto. While high staking yields might look quite promising, you cannot have solid proof of accountability.
- You should not focus solely on annualized rewards or APYs. On the contrary, you should look for reputation and the time for which the platform has been operational.
- Go with reliable analytics platforms to find information on PoS-based platforms. You could discover information about third-party staking services as well as staking-as-a-service platforms.
- Finally, you should also ensure that you read the terms and conditions of staking cryptocurrency before staking. The rules for governing the staking process address various aspects including connectivity of the wallet to the internet. In addition, the rules also define the cooling period for staked crypto prior to unstaking and the minimum amount for staking.
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Where Can I Begin Staking?
Staking is a quite convenient and open process on PoS-based cryptocurrencies. You would need a substantial amount of crypto investment in the blockchain platform of a cryptocurrency. Now, you can just choose an exchange for carrying out the staking process on your behalf. On the other hand, you can also go with a manual process of staking. However, staking crypto through exchanges presents formidable advantages with intuitive and easy-to-use interfaces. One of the notable examples of exchange for staking cryptocurrencies refers to Binance. You could also stake your crypto assets on a hardware wallet such as Ledger with a straightforward approach.
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Staking cryptocurrency has definitely emerged as an appealing opportunity for crypto investors to reap promising returns on their crypto holdings. You can think of crypto staking as something similar to working of high-dividend stocks or bonds. Attractive returns with staking crypto tokens have been responsible for driving billions of dollars into this industry.
Furthermore, the PoS protocols also play a crucial role in addressing the environmental concerns associated with some networks. On the other hand, crypto staking also presents some notable risks such as the possibility of losing coins in a wallet. At the same time, price volatility concerns also present risks for staking cryptocurrencies. Therefore, it is important to evaluate the risks and rewards you can get with staking on the basis of various factors. Learn more about staking cryptocurrencies and explore a new avenue for leveraging crypto assets to your financial advantage.