What is Staking Crypto? A Comprehensive Guide to Cryptocurrency Staking

Cryptocurrency staking is an increasingly popular way to earn passive income with your digital assets. 

By investing and “staking” your crypto coins, you can earn rewards for holding them. 

In this comprehensive guide, we’ll discuss what cryptocurrency staking is, how it works, and what strategies you can use to maximise your profits. 

Let’s dive in!

What is Cryptocurrency Staking?

Cryptocurrency staking is a popular way of earning a passive income from your cryptocurrency assets. 

Staking involves locking up some of your crypto coins or tokens in the blockchain, in order to earn a percentage of interest as a reward after a set time period. 

Peercoin was the first cryptocurrency with a functioning Proof of Stake system, and was created in 2012. However, Proof of Stake systems and ‘staking’ have only really taken off in the last few years. 

How Does Cryptocurrency Staking Work?

In order to understand how cryptocurrency staking works, we must first understand the Proof of Stake system. 

Proof of Stake or ‘PoS’ is a blockchain consensus mechanism, used to validate cryptocurrency transactions in the blockchain. 

Proof of Stake was invented as an alternative to the Proof of Work consensus mechanism, used originally in cryptocurrencies such as Bitcoin. Proof of Stake uses a lot less energy in comparison to Proof of Work.

Proof of Stake works via owners of a cryptocurrency staking their coins in the blockchain, where these coins can then be used by the blockchain to validate transactions and add new blocks to the blockchain. 

Staking can typically be carried out via your crypto wallet or through a cryptocurrency exchange. There are also specialised staking platforms, designed to help you get the best return from your staked tokens. 

The easiest way to stake your tokens is through an exchange, as they take care of assimilating your assets into mining pools and help you to return rewards on even a small investment. 

For example, Coinbase allows staking through their platform, and their estimated return on staked Tezos (a popular Proof of Stake crypto) is 5% per annum. 

The process is usually as simple as clicking the ‘stake’ button next to your chosen cryptocurrency, though the specific process (and terms and conditions)  for each platform should be outlined clearly on their website.

So, how does staking work directly from your wallet? 

If you wish to stake directly through your wallet, your best bet will be to join a staking pool. A staking pool is where individual crypto holders pool their crypto assets together to stake. 

Staking rewards are acquired when a new block is added to the blockchain through the use of staked tokens, and the rewards go directly to the user whose tokens were randomly selected to build the new block. 

Therefore, when a group of individuals stake their assets together through a staking pool, they have a greater chance of having their staking randomly assigned to build the new block, and therefore a greater chance of earning rewards through staking. 

In a staking pool, rewards are evenly dealt out to each contributor in the staking pool, in relation to the amount of coins they originally invested. 

Often staking involves a ‘vesting’ or lock-up period, so make sure you read the fine print before committing your crypto assets! 

The Benefits of Staking Cryptocurrency

So now you know how staking cryptocurrency works– but what are the benefits?

A Reddit thread from 2021 posing the question, “Is staking worth it?” for those with little capital to invest received a top comment that seems to have hit the nail on the head:

“If you hold, your assets just sleep in your wallet.

By staking, you’re earning new coins doing NOTHING.

Small percentages are better than 0.”

Passive Income

One of the most straightforward benefits of staking cryptocurrency is that it creates a passive income for you using your crypto assets. 

If you have crypto assets you are planning to hold and not to use in day trading, then staking may be especially suitable for you. 

Staking rewards vary in percentage, but the minimum sits around 4% per annum– and can even be in excess of 10% per annum! 

This percentage of interest is higher than most traditional savings accounts, and if you place your investments wisely it can be very profitable.  

Staking is also a way for new investors to get started with crypto, as it requires a lot less research and far less time than day trading. 

Strengthens the Blockchain 

Besides generating a passive income for you, staking helps to strengthen the blockchain of your chosen coins. 

As explained by Tanim Rasul, one of the founders of National Digital Asset Exchange,

“Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions.” 

While your assets are banked down in the blockchain, they’re being put to work validating transactions and ensuring the security of the blockchain. 

The more coins that are banked in the blockchain, the smaller risk is of corruption or degradation in the chain. 

This stability of the blockchain for your chosen token will help to increase its validity in the crypto-sphere and its functionality as a decentralised currency, as opposed to merely being a stock held and traded for financial gain.

This in turn may raise the price of the cryptocurrency in the long run, meaning monetary rewards for you in the future. 

Proof of Stake does away with the crypto mining of Proof of Work, where staking your coins is functionally similar to mining in Proof of Work consensus cryptos. 

The crypto mining game has long been dominated by commercial rigs, and is very hard to enter into as an individual as it requires immense computer power, plenty of space, and is very costly energy wise. 

Staking is a much more user-friendly way for individuals to benefit from the formation of new blocks in the blockchain, as opposed to all the rewards going to the miners who can afford to maintain elaborate computer rigs. 

Types of Cryptocurrencies You Can Stake

Not all cryptocurrencies can be staked. This is because, as aforementioned, a cryptocurrency must use the Proof of Stake validation method for you to be able to stake it. 

Many cryptocurrencies instead use the Proof of Work method (also explained above), and therefore you cannot stake them. 

Currently Ethereum, the most well-known Proof of Stake cryptocurrency, has an approximate return between 4.9% to 21.6%. 

Ethereum stakes are currently unable to be withdrawn until the Shanghai upgrade scheduled in March 2023, so keep this in mind if you are considering staking your Ethereum! 

This is because Ethereum has recently switched from Proof of Work to Proof of Stake, and ‘The Merge’ is in process. During this time, stakes must be held in the blockchain to facilitate ‘The Merge’ and ensure the blockchain’s security.

Some other popular cryptocurrencies that allow staking are: 

Cardano

Created by one of the founders of Ethereum, Cardano is an energy efficient crypto with much faster processing power than BTC or Ethereum. Cardano was launched in 2017 and, as of January 2023, has a market cap of $12B. 

Solana

Solano is another efficient crypto with smart contract functionality. Solana was launched in 2020 and currently (as of January 2023) has a market cap of $7.7B.

Avalanche

Avalanche is an open source project, which means anybody can access and contribute to the platform’s code. Avalanche prioritizes transaction speed and rivals Ethereum in its applications– often cited as Ethereum’s biggest rival. Avalanche currently has a market cap of $5.4B, and was launched in 2021.

Tezos

Tezos is described as a decentralised computing platform, and was launched in 2018. The crypto works to deploy smart contracts and run Decentralised Apps through the blockchain. Tezos prioritises transaction speed and scalability.  

Strategies for Maximising Your Profits from Staking

There are a few different strategies for maximising cryptocurrency staking profits.

Be Wary of Tokens with High Inflation 

These kinds of cryptocurrencies can be profitable in the short term; however, you should be wary of them for longer term investments like staking as their volatility may cause the token to crash. 

If a currency’s market value crashes significantly while you have stakes in the token, your percentage returns will become minuscule in comparison to your originally perceived returns. This may result in a net loss as a result. 

Look for Usescases

Look for a functional cryptocurrency; a cryptocurrency with real usecases

These cryptocurrencies are more likely to have healthier market relations, are less susceptible to volatility, and have a steady increase in market price over time. 

A good example of a functional cryptocurrency is Ether. Ethereum is a blockchain platform that allows for the running of decentralised apps (Dapps) and smart contracts on the blockchain. 

Fixed Supply

Another aspect to consider when choosing which cryptocurrency to stake is whether or not the token has a fixed supply. 

If a token has a fixed supply, demand is likely to (at least eventually) outweigh supply. Since supply and demand are the main drivers of price in a free market, this mechanism is likely to push up the price of the crypto over time. 

Therefore, fixed supply cryptocurrencies are more stable bets for staking as they are more likely to increase in value over time!

Tokens Staking

Tokens staking typically involves participation in DeFi or the staking app of a specific project. There are numerous ways to stake tokens, depending on the DeFi app and the token in question.

One common type of token staking is being a liquidity provider (LP). In this method, users can stake token pairs (like ETH and USDC) in a DEX ( Decentralized Exchange ) like Uniswap, SushiSwap or PancakeSwap.
By providing liquidity, they earn a share of the trading fees generated by the exchange.

Another type of token staking is governance participation. Most of DeFi protocol have a native token, such $UNI for Uniswap, $Cake for PancakeSwap. Those tokens gives holders the ability to vote on proposals to upgrade the platform.
By staking their tokens, users can increase their voting power and potentially earn rewards for participating in the governance process.

Some Dapp ( decentralized app ), like Earneo, also offer tokens staking in orders to reward their holders.

Conclusion

In conclusion, staking is a way to earn rewards on your cryptocurrency assets by placing them back in the blockchain. 

The benefits of staking include passive income, blockchain strengthening and a profitable alternative to crypto mining for the every-day trader. Additionally, it offers a way for you to generate revenue from coins you would otherwise hold (if you’re not day-trading). 

Proof of Stake has become such a popular and functional consensus mechanism that Ethereum has embarked on a transition from Proof of Work to Proof of Stake– which is nearly complete! 

If you’re looking to stake your coins, you can use a cryptocurrency exchange, staking platform, or even stake directly from your wallet via a staking pool. 

Finally, before staking a cryptocurrency, there’s a few things you may want to consider: 

  • Is the coin functional? 
  • Is the coin’s market value especially volatile?
  • Does the coin have a fixed supply?

All these factors go into determining whether a cryptocurrency is likely to be profitable in the long-run, which is a crucial factor for staking! 

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