Crypto staking is a relatively newer concept that is creating quite a buzz in the community. Although the technicalities of staking are moderately complex, if you want to earn rewards, the fundamentals can be comprehended in a few minutes.
In simple terms, staking is primarily a way of earning some profit by holding particular cryptocurrencies. Today’s article explains how crypto staking rewards work and why they can be profitable.
Working mechanism of staking
- There are only a few cryptocurrencies that allow staking. Popular options are Ethereum (after the ETH2 upgrade), Tezos, and Cosmos. You can lock up your holdings in these cryptos to earn a percentage of up to 12% in rewards. The process transpires through a staking pool, which is similar to an interest-bearing savings account.
- As the blockchain puts your holdings into work, you earn rewards in proportion to the money you staked. A consensus mechanism called Proof of Stake is employed to handle the process and ensure that the given transactions are verified and secured without any middleman such as a payment merchant or bank.
What is Proof of Stake?
- Proof of Stake or PoS consensus mechanism is the heart of staking, which has an increased speed of execution and enhanced efficiency in comparison to Proof of Work (PoW). As a result, the fees are also significantly low.
- Proof of Stake cuts costs by removing the requirement of miners to churn through solving math problems. Consequently, the energy-intensive process of mining is not required to validate the transaction and directly gets handled by the PoS mechanism using the cryptos invested in the staking pool.
Benefits of Staking
- Experienced crypto investors find staking a rewarding process where they can earn rewards from holding cryptos and putting them to work. Besides profit, staking contributes to the security and efficiency of the blockchain ecosystem in which traders put their money. This practice makes the blockchain unsusceptible to cyber-attacks and reinforces its capacity to process transactions independently.
- Basically, staking in crypto can gain your profit with little effort. Furthermore, the process is based on the concept of PoS that can obtain a good interest without directly validating transaction blocks by solving mathematical problems. That being the case, staking becomes a dependable and robust source of passive income. On average, 5 to 12 percent return is expected by merely locking the funds up in a staking pool.
Risks in staking
- Like any other financial strategy, inherent risks are associated with the operation of staking. Remember, staking requires locking up your fund for a certain period. During this time, also known as Vesting Period, you can not transfer money elsewhere.
- As a result, your staked tokens are locked and can not earn you tokens through trade even if the price shifts. For this reason, research the project you want to stake in thoroughly before making any decision.
How to start staking
- Staking doesn’t have exclusive participation. The ecosystems which support staking are generally open to all. These platforms look toward bringing validators to their network. However, being a full validator requires a substantial amount of funds. For Ethereum, a minimum of 32 ETH tokens are required. Apart from that, having dedicated computers that perform validation throughout the day without downtime is crucial for success for advanced traders with plenty of technical know-how. Remember, participation at such a level can bring obligations as downtime can trim down the validator’s stake to a certain degree.
- If you are merely starting to explore the new concept of PoS and staking as a whole, there is a more straightforward way to participate. Opt for centralized exchanges such as Coinbase or Binance to contribute any amount to the staking pool. This approach is better for beginners as the barrier of entry is particularly low, and validators can earn without owning dedicated hardware.
Is staking profitable?
Yes. Staking your cryptocurrencies is undoubtedly profitable. When you stake tokens within smart contracts, you get access to various levels of features and participation rights across the staking platform. Then, these staked tokens are put to work for validating transactions to earn you rewards. Think of this as a sort of security deposit to reinforce service standards and prevent malicious activities within the blockchain ecosystem.