There are many ways you can go about making money with cryptocurrencies. Rather than buying or exchanging crypto, you can grow your investment by staking, a process where investors lock up some of their assets to contribute to the blockchain network.
We have put together this guide, introducing you to crypto staking, to help you understand how it works, its advantages and disadvantages, and how to start staking crypto.
What Is Crypto Staking?
One can say that staking crypto works like a long term savings account for regular currency. The bank gives you the option to deposit money under the agreement of not withdrawing it for a certain period of time and in return allow you to earn interest on those savings. In a similar way, crypto staking is a process that involves locking-up cryptocurrency holdings for a set amount of time in order to earn rewards.
In simple terms: Staking is placing your coins somewhere where you can’t access or use them for a period of time, so in the future you can get back the coins you already had plus some additional ones as a reward.
However, there are some key differences to keep in mind. While a bank might access funds in your long-term savings to invest elsewhere, staked crypto is used differently. The assets you stake are instead used to contribute to the blockchain itself by participating in transaction validation. We’ll get into more detail about how this works in the section below.
How Does Staking Work?
Crypto staking is directly related to a proof-of-stake mechanism used by many decentralized blockchain platforms. In proof-of-stake, validators take part in a “contest”, where the winner is chosen to add the next block of the blockchain. This helps PoS blockchain networks to remain error free, since its users are putting their own assets at stake, raising their incentive to keep the network free from inaccuracies.
Validators are chosen at random by the protocol, therefore the more crypto you have “at stake” the higher your chances of being chosen.
You might be asking, what is the value in being chosen to create a new block for the blockchain? Well, in the case you were chosen, not only would you be validating and adding the next block, you’d also be rewarded with new coins and staking fees for your contribution. Since cryptocurrency assets have a value, increasing your number of coins translates into financial earnings.
At the same time, the more crypto coins or tokens are staked, the more limited the supply, which can help drive up the value of the asset itself.
Note: Not all cryptocurrencies can be staked, but there are a lot of them that will allow you to do so. Some of the major crypto assets supporting staking include Ether, Cardano and Solana.
Are There Any Risks Involved In Staking Crypto?
Staking is not ideal for everyone. Cryptocurrencies themselves are considered volatile, high-risk financial assets. Likewise, there is some risk involved in staking crypto. First of all, you should always keep in mind the volatility of the crypto market, resulting in frequent price changes for your assets. A significant price drop for the cryptocurrency you are staking might make the potential rewards far less attractive. Additionally, crypto staking involves transaction fees, which can also affect your earnings.
When staking crypto, you are also agreeing to keep your funds locked up for a period of time, which means that you won’t be able to access those funds for a while. It is important that you aren’t staking any funds that are crucial to you or that you might want to get hold off in case of an emergency.
How To Stake Crypto?
There are several approaches you can take to staking. Let’s take a look at each one.
Using An Exchange
Many of the most popular exchanges offer staking as a service. This option has the advantage of allowing you to easily enable this option in a few clicks and get started, without worrying about anything technical. However, you should keep in mind that exchanges will charge you a fee or commission for staking crypto.
Using a crypto wallet
You can also stake crypto directly from your crypto wallet, if it supports this feature. You can use the wallet to select a validator or a staking pool run by a third-party to stake a certain amount of your assets for you. This gives you more control over the staking process than entrusting everything to an exchange.
Becoming A Validator
Finally, crypto investors have the option of becoming validators themselves. This is the least user-friendly option, since it requires expertise, technical knowledge, advanced software and equipment. As a result, not every user will be a good fit for this staking method.
Becoming a validator can also have a high-entry cost in terms of staked assets, which is why many opt to pool their staked crypto through “staking pools”.
Staking is one of the options allowing cryptocurrency holders to grow their investments over time and earn great rewards. At the end of the day, deciding whether staking is the right move for you will depend on how confident you are in the future of the asset you are staking and how comfortable you feel with locking up your funds for an extended period of time.