Just like the many different aspects of digital money, staking cryptocurrency can seem like a simple or a complicated idea. It all rides on how deeper you want to go in understanding the game. For many investors staking plays a key role in earning profit by holding on to a few cryptocurrencies. Thus, your goal may simply be to earn some extra rewards by staking crypto, but it sure helps to understand its workings of it. Read more
What is crypto staking?
Staking cryptocurrencies is essentially a method where you promise your personal crypto assets to back a blockchain network and verify the transactions. Usually, the cryptocurrencies that use the proof-of-stake method to process transactions facilitate crypto staking. Remember that proof-of-stake is more energy-efficient as compared to the proof-of-work model. Proof-of-work demands mining devices that can make use of computing power to solve mathematical equations.
Staking crypto can turn out to be a brilliant way to make use of crypto assets and have a stream of passive income given the high rates of interest involved.
How does crypto staking work?
If the cryptocurrency in your possession lets you stake, you can literally put some of the assets on ‘stake’ to earn a reward over time on a percentage rate basis. Presently, Tezos, Cosmos, and Ethereum allow staking crypto. Typically, this takes place through a ‘staking pool’ that works a lot like a savings account on which you earn a regular interest.
Your crypto assets earn rewards essentially because, in staking, your crypto is being put to work by the blockchain. Cryptocurrencies that facilitate staking use proof-of-stake which is a consensus mechanism that verifies and secures transactions without an intermediary. When you choose to stake your crypto asset, it goes on to join the process.
To get started, participants must promise/pledge their crypto tokens to the cryptocurrency protocol. The protocol then picks validators from the different participants who then validate the transactions. The higher the number of coins you pledge, the better chances you have of being chosen as a validator.
Whenever a new block is added to the blockchain, a fresh set of cryptocurrency coins are minted and distributed to the block’s validators as staking rewards. Generally, the cryptocurrency you stake is the same one that you earn for staking crypto but there may be a few exceptions.
The first step to start staking crypto is to invest in a cryptocurrency that works on the proof-of-stake model. Note that not all cryptocurrencies let you stake, this is only an option with the ones that use this proof-of-stake method. Once you choose your crypto, you can select the amount of crypto you want to stake via a cryptocurrency exchange of your choice. Remember that even when you are staking crypto, you still own them and can choose to unstake them if you want to trade those assets. You are simply putting your cryptos to work by staking them, the ownership remains intact.
How to stake crypto
Staking cryptocurrency could be a bit difficult to process at first but once you get the hang of it, the whole thing seems very simple. Below is a step-by-step process for staking crypto:
- Buy crypto that uses proof of stake.
We know that not all cryptocurrencies support staking and thus a cryptocurrency that validates transactions using proof of stake is important. Some major cryptocurrencies that allow staking are listed below:
- Ethereum (CRYPTO: ETH) is the first-ever cryptocurrency which has a programmable blockchain that can be used by developers who want to create new apps. Ethereum was originally using proof of work as it was created right after Bitcoin, but it’s gradually moving to a proof-of-stake model.
- Cardano (CRYPTO: ADA) is one of the most eco-friendly cryptocurrencies out there. This is because it is based on peer-reviewed research and several evidence-based methods were used to develop this cryptocurrency further.
- Polkadot (CRYPTO: DOT) facilitates interoperability among different blockchains and allows them to work seamlessly with each other.
- Solana (CRYPTO: SOL) is a blockchain that supports quick transactions with very minimal fees. Scalability is a key aspect of its design.
- Transfer your crypto to a blockchain wallet.
Once you purchase crypto, you will be able to access it from the purchase you bought it from in the first place. Certain exchanges use their own staking programs with a particular set of cryptocurrencies. If this happens, you should be able to stake cryptocurrencies through the exchange itself.
If this is not available, you would have to transfer these funds to a digital wallet also called a crypto wallet. They’re one of the most secure ways of storing cryptocurrencies that are typically high in value.
Once you have a crypto wallet, deposit the crypto by choosing the kind of cryptocurrency you want to deposit. When you do this, you would get a wallet address that you paste into your exchange account to withdraw crypto and transfer them to your wallet.
- Join a staking pool.
Different cryptocurrencies may have different ways of staking but usually, they’re done through staking pools. Crypto investors accumulate their funds in this staking pool so there is a higher probability of earning staking rewards. Do thorough research of the staking pools you could be a part of with your cryptocurrency asset. A few things to look at:
- Reliability: If your staking pool’s servers are down, you’re not going to earn anything. Choose a pool with an uptime that’s nearly 100%.
- Reasonable fees: Staking pools in general will take a fee from the staking rewards. It is uncommon for this cut to be exorbitant as it is usually between two to five percent.
- Size: While smaller pools are less likely to be picked for validation, if they get selected, there are bigger rewards to be earned as it does not get divided among too many participants. There are also some cryptos that cap the number of rewards a pool can win and thus the biggest pool could get oversaturated hence, mid-sized pools are your best bet.
In general, staking is open to all but it requires a participant to have a considerable minimum investment, technical knowledge, and a system to perform the validations without any downtime.