What is staking in crypto?
July 27, 2023
As a cryptocurrency trader or investor, you might think that the best and the only way to make a profit out of the crypto market is to sell your digital asset when the market price increases. But that’s not the whole idea. Cryptocurrency is a new and complex market that can surprise you with the opportunities
you have to invest in this huge market. There are other ways to make money in this market, like staking. With staking cryptocurrency, you can put your cryptocurrencies to work in a project and earn passive income without speculating on the price movement or selling your cryptocurrencies.
You might have experienced depositing cash in a high-yield saving account in traditional banking systems; staking is a similar idea; here at Aron Groups, we designed to put everything you need to know about staking in cryptocurrencies in just one article. So, keep reading to learn everything about earning passive income using cryptocurrency.
Table of Contents
What is staking?
When it comes to cryptocurrency, there are always some complicated Concepts and ideas depending on your understanding of the market. You can be a simple Trader and buy crypto at the lowest price to sell it at the highest price and make a profit. But in this case, you are no different from an investor trading stock. The crypto market is a young and new market with lots of opportunities. Staking is a great way to make money while holding onto your cryptocurrencies. If you don’t want to sell your cryptocurrency, but at the same time, you wouldn’t be ashamed to make money while holding onto them.
Previously we have talked about holding strategy and how you can profit just by keeping your cryptocurrencies for a long time. But staking is another great way to profit without selling your character currencies.
The idea is to lock your cryptocurrencies for a predetermined period in a project to help support the operation of that blockchain, and you will be rewarded with more cryptocurrencies.
Some blockchains use a proof of stake consensus mechanism to secure the network. In this type of blockchain, participants must stake cryptocurrencies in the network to validate new transactions and create new blocks.
The cryptocurrency they have in the network acts as a guarantee in case the validator fails to validate transactions properly.
Proof of Stake Validation
every blockchain that uses the proof of stake mechanism relies on staking to operate. As a validator, you are supposed to provide cryptocurrencies to the blockchain, and the beer does take the greater your chance of getting to add the new block and get the reward. On the other hand, if you wish to have a saying in future changes in the network, you can deposit larger amounts of cryptocurrencies into the network. On the other hand, when you are staking, you don’t have to do it alone. You can participate in staking pools, and the pool operators will validate the blockchain.
How does staking work?
You can Stake Your cryptocurrencies in every blockchain that uses a proof of a staking mechanism; since this type of blockchain relies largely on staking to add a new block to the blockchain, people who stake their cryptocurrency on such blockchains confirm and verify transactions and help the blockchain to operate.
To stake Your digital asset unit, deposit your cryptocurrencies to the cryptocurrency protocol. next, you need to wait for the protocol to choose validators, and generally, the protocol chooses validators with more coins staked in the project.
The money you have provided to the protocol will be locked up and used to help maintain the security of the blockchain. In exchange, you will be rewarded for your cooperation and validating transactions.
Validators are responsible for adding new blocks to the network, and they mint new coins, which are the reward for validating transactions and generating new blocks. Generally, the rewards are the local cryptocurrency of the network, although you might find blockchains that reward you with a different type of cryptocurrency.
How to make a passive income using staking?
Every protocol has a specific strategy that tells you what they offer you for sticking rewards. You need to review the program and find out what minimal amount of coin you must deposit in the protocol and how much profit you will make annually. Remember, in most cases. You must unstake your cryptocurrencies by the deadline. You have to wait for a specific time before being able to withdraw your cryptocurrencies. and in the meantime, you will be rewarded according to this schedule. You can use the reward to invest in others, the market put up for a, or even trade for cash or other cryptocurrencies.
The advantage of the staking cryptocurrencies
here we are going to some of the benefits of staking crypto:
- The fascinating things about staking cryptocurrency are that when you are locking your cryptocurrencies in a protocol, the coins are still in your position, and you’re only putting them to work to earn some passive income.
- If you want to invest in cryptocurrencies but don’t want to sell your coins, the best strategy is to put your cryptocurrencies in a protocol and stake them in returns of reward; this way, while holding onto your cryptocurrencies, you’re earning passive income.
- It is really easy to get started staking cryptocurrencies. You only need an exchange or a crypto wallet to start staking.
- The advantage of staking cryptocurrency is that you can support cryptocurrency projects you like the most. By staking your cryptocurrencies, you are making that blockchain more powerful and resistant to attacks.
- On the other hand, you are helping to keep the network decentralized because staking allows the network to use everyone for validating transactions. Decentralization means no need to use a single entity to control the whole network.
- Comparing proof of work mining and staking, it is worth mentioning that staking is a more re-efficient and environmentally friendly alternative since less computing
power is used to validate transactions and create new blocks in staking.
The disadvantage of taking cryptocurrencies
As a validator, you are required to do complete research. You need to know the goal of the project you plan to stake your cryptocurrency in. You need to understand the technical requirements and procedures. Here we will go through some of the disadvantages and risks involved with crypto staking:
- The cryptocurrency market is still volatile and young, so the value of the staked cryptocurrency may decrease suddenly while it is locked up in a blockchain.
- Most of the time, there are penalties for validators that violate network rules. These penalties would reduce some or all of these staked coins.
- If a small number of validators hold a significant portion of the staked cryptocurrencies, that network’s risk of centralization increases.
- As you need to keep your coins locked up in a wallet for an extended period, there is always the risk of technical failure that can result in the loss of your cryptocurrencies.
- The last disadvantage of staking cryptocurrency is that you are no longer in charge of your cryptocurrency, meaning that you cannot sell or exchange them for a specific period since your cryptocurrency will be locked up for a predetermined
period. So, you cannot consider another type of investment because you need access to your assets.
How to Stake Your Cryptocurrencies?
If the staking cryptocurrency still seems a bit confusing for
let’s go through the process and help you stake your cryptocurrency step by step:
1. Buy a PoS cryptocurrency
As previously noted, not all blockchains offer staking opportunities. You must choose a cryptocurrency with a proof of stake consensus mechanism for validating transactions. Here are some of the major cryptocurrencies you can
stake:
Ethereum:
It is the first cryptocurrency that allows developers to create decentralized applications; initially, the network used the proof of work mechanism and later transitioned to a proof of a state model.
Cardano:
it is an eco-friendly digital currency that was developed using an
evidence-based method.
Polkadot:
In this protocol, different blockchains can connect and work alongside one another.
Solana:
These blockchains solve the scalability problem and offer fast transactions with low fees.
2. Transferring your cryptos to a wallet
Now that you have chosen your favorite cryptocurrency to stake, you need to set up a wallet that supports staking. It is recommended to use the wallets that are listed on the blockchain’s official website. You can either use a software wallet or a hardware one and transfer your staking coins to a wallet.
3. Start staking
Read the network-specific instructions for staking on the blockchain’s official website and begin staking. You can also join a staking pool to combine your funds with others to have a higher chance of earnings taking rewards.
4. Calculation of staking rewards
Every blockchain uses a different method of calculating rewards, which might differ on a block-by-block base. There are many factors considered when calculating staking rewards, some of them are as follows:
- The amount of coin you have pledged to the network.
- The length of time the validator has been staking.
- The number of all the coins staked on the blockchain.
- The performance of the validators.
- The transaction fees.
- The inflation rates.
Why can you only stake in some cryptocurrencies?
Because staking is only available on blockchain that uses a proof of stake blockchain mechanism, in this type of network, validators or needed to secure the network, and they do that by staking their cryptocurrencies into the blockchain. In this type of blockchain, validators do not solve complex mathematical equations using computational power like the proof of work consensus mechanism.
On the other hand, you cannot Stake cryptocurrencies on every PoS crypto Project because other crypto Projects may use another mechanism to ensure the security of for network. For example, if a cryptocurrency uses delegated proof of a stake or DPoS, staking is not possible in the traditional sense.
Is it a good idea to stake crypto?
Staking cryptocurrency is a perfect strategy for investors willing to generate yields on long-term investment; these types of investors do not care about short-term fluctuations in price, and they don’t want to sell their cryptocurrency to make small returns. As an investor, you need to research your favorite cryptocurrency to learn more about the terms of a staking period and determine how long your cryptocurrencies should be locked up in a project. Remember, if the interest rate is too high to be true, you should be more careful; we at Aron Groups advise you to only work with companies with a positive reputation and not just a high-interest rate.
Remember that staking, like any other crypto investment, involves a high risk of losses. Taking involves small contracts pruned to bugs, so it is really important to do complete research and stake using highly secure wallets.
Ultimately, it is recommended to only stake a small amount of cryptocurrency you can afford to lose.
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