What is Staking in Crypto?

Remember the time when someone introduced you to crypto? They probably advised you to buy a coin and hold (hodl) it for some time to make profits 💰. That’s because when thinking of how to make money from crypto, many people instantly think of active trading or leaving the coins in their wallet until the price goes up 🚀.

But, did you know that crypto staking is one of the most common alternative ways to earn money from crypto? Staking allows you to lock up your coins on a blockchain network and earn periodic rewards 💰. But, is there more to staking, and how does it work? Keep reading!

What is Staking?

Staking is a cryptocurrency investing strategy that involves locking up coins and earning rewards. These are called staking rewards, and are usually represented by annual percentage yields (APYs). So, when you see a blockchain network saying it pays X% APY per annum, that’s how much profit you can earn when you lock up your coins in their staking pool for a year. 

For instance, if a staking platform pays 30% APY per annum, staking $1,000 worth of crypto will earn you extra $300 in 12 months (usually paid monthly) without having to trade or do anything else. 

But, the definition above is from an investor’s perspective. In the actual sense, staking is used to support a blockchain. It secures the network and ensures transactions run smoothly. That way, there won’t be liquidity issues or double spending (a case where someone spends the same crypto twice). That’s why when you stake your crypto within a network, you earn rewards for your “job.”

How Does Staking Work?

Before explaining how crypto staking works, let’s backtrack a bit to how blockchains work. Generally, blockchain networks use two major systems (consensus mechanisms) to agree on and verify their transactions: proof of work (PoW) and proof of stake (PoS). 

Proof of work blockchains like Bitcoin and Litecoin use miners to process transactions and pay them free tokens for their job 🪙. 

Conversely, the proof of stake system uses a group of people called validators, who perform the same function as miners. Without these validators, your transaction won’t be confirmed or processed when you send PoS coins like Ethereum (ETH) and Solana (SOL) to another person. 

For staking to happen, users within a PoS network must lock their tokens in a smart contract to become validators. This kind of contract requires no human effort after the tokens are locked. Instead, the automated system takes over. 

Afterwards, you’ll earn returns, depending on how long you stake your tokens and how much you lock up in the staking pool. So, it’s like putting your money in a fixed deposit account in a bank and earning an interest ➗. 

Why is Staking Important to Blockchain Networks?

As a crypto investor, you’re probably concerned about the potential earnings from staking rewards. But for PoS blockchains, here are some of the benefits of staking:

Smooth Transaction Flow ⚡

Staking helps blockchain networks process and complete transactions through consensus (the agreement across transaction processors or validators). Without some people staking their assets on a blockchain, there won’t be selected validators to process transactions. 

Network Security 🔐 

Another importance of staking to blockchains is security. Staking ensures that every transaction is vetted by validators before it’s processed. If a validator dishonestly tries to validate fraudulent transactions, they can lose their staked coins through a process called “slashing.” That way, the network is protected from scammers or network attacks. 

Creation of New Tokens 🆕

People who stake their coins are usually rewarded with free cryptocurrencies, usually the blockchain’s native token. For them to earn rewards, new tokens are created and added to the existing number in circulation. 

What Popular Coins Can You Stake?

Every cryptocurrency that runs a proof-of-stake system can be staked by investors. These include but are not limited to:

• Ethereum (ETH)
• Cardano (ADA)
• Solana (SOL)
• Polkadot (DOT)
• Algorand (ALGO)
• Binance Coin (BNB)

What Are the Risks of Crypto Staking?

Despite its perks for investors, crypto staking isn’t free of risks. Here are some downsides to note before participating in staking activities:

• Lock-up periods are requested by staking platforms. If you choose the fixed staking option, you cannot withdraw or trade your staked assets during the staking period. So, if you change your mind or need your coins quickly, you may be unable to access them. If you still want access to your coins after staking, it’s best to opt for flexible staking. 
• Unpredictable pricing due to price swings. You may gain or lose more from sharp price changes. 
• Technical and security issues like smart contract bugs or hacks can cause you to lose your funds. 
• Regulatory issues may arise if there are new laws around crypto staking.  

Final Thoughts

Staking has already found its place in the decentralized finance (DeFi) space, offering investors an effective way to earn passive income. Moreover, it’s the bedrock upon which network security and liquidity are built.

One thing is sure. Like cryptocurrencies, staking has come to stay. With increased regulation and clearer frameworks, it could become a common investment method for both retail and institutional investors. However, always pay attention to the risks and do your own research. 

Disclaimer: This content may cause extreme FOMO (Fear of Missing Out). Side effects of investing include sudden wealth (or, you know, the opposite 😢). Please do your own research (DYOR) or speak to your financial advisor before making any decisions.