What is Staking Crypto? Everything You Need To Know
Thinking about staking crypto this year? Whether as a method to fight back against inflation or because the interest on a savings account just isn’t cutting it anymore, crypto staking can be a great avenue to earn additional income.
Staking crypto locks up crypto assets to earn interest, so consumers can set it and forget it. The recent crypto market sell-off may have left many wondering if staking crypto is even worth it at this stage. But rest assured — there are many benefits to staking crypto assets.
What Is Crypto Staking?
Staking crypto is an excellent way to earn passive income from crypto holdings. The rewards can be particularly attractive for those who already have a significant portion of their net worth in crypto.
There are two main consensus mechanisms in crypto: proof of work, or PoW, and proof of stake, or PoS. The job of consensus mechanisms is to ensure that transactions are legitimate. Once transactions are approved, a new block is added to the blockchain. In essence, these protocols secure the network.
PoW mechanisms use computational power to secure networks and do not allow crypto to be staked. In contrast, PoS mechanisms maintain security through validators that lock up crypto — or put it at stake, which is where the term “crypto staking” comes from. In return for staking crypto to secure the network, the validators are given rewards.
How Do You Stake Crypto?
Not many crypto holders can become validators. This is due to the significant value of crypto holdings required, as well as the need for hardware infrastructure with sufficient computational power. However, there are crypto-staking options with fewer barriers to entry.
Two of these options are:
- Staking pools
- Exchanges
Staking Pools
Many staking pool options exist, such as P2P Validator and Stakin. These platforms offer crypto staking solutions that “pool” together crypto assets from multiple contributors. This means the amount of crypto required to stake is lower than if a person were to become a validator themselves.
Exchanges
For most crypto holders, exchanges are the most accessible and easiest option for staking crypto. Some of the largest crypto exchanges such as Coinbase and Binance offer crypto staking services.
Coinbase offers its users rewards simply for holding a sufficient amount of particular cryptos in a wallet, and payouts range from daily to every quarter. The staked crypto doesn’t even have to be purchased on the Coinbase exchange.
Binance is one of the most comprehensive crypto staking solutions. It has over 112 tokens that can be staked for 30, 60, 90 or 120 days in most circumstances.
Which Cryptos Can Be Staked?
Only PoS cryptos can be staked. Some of the most popular and regularly staked cryptos include Ethereum (ETH), Polkadot (DOT), Solana (SOL), NEAR Protocol (NEAR), Cardano (ADA) and Tezos (XTZ).
What Are the Benefits of Staking Crypto?
Crypto can be held safely in a wallet and ownership can be maintained throughout the crypto staking process. Staking crypto also provides rewards in exchange for verifying transactions and securing the network.
This reward is a percentage yield, similar to a dividend payout or the interest earned on a checking or savings account. The return is unique for each crypto staked, but in almost all circumstances, it is far higher than the annual percentage yields consumers typically receive from traditional banks.
Staking crypto gives people the opportunity to earn extra passive income from their assets. The more crypto staked, the higher the potential rewards. So, those with large crypto holdings can become extremely rich from staking. For long-term holders of PoS crypto assets, it acts as an excellent form of wealth building. If done responsibly, it can be very profitable.
Is Staking Crypto Safe?
There are a number of risks to be aware of when staking crypto.
One potential downside is general crypto price changes. As mentioned above, yields earned will depend on the crypto token. Cryptos that are more volatile sometimes offer higher returns, but this comes at the risk of a decline in the price of the underlying token.
In such a case, the benefits from staking the crypto may result in an overall loss. An example of this is the recent Terra LUNA token collapse, which led to billions in losses. Some crypto staking requires assets to be locked up for a set period of time, which means no action can be taken, even when the price of the crypto plummets.
The hacking of liquidity pools can also result in the complete loss of the crypto tokens staked. For some, this threat is not worth the possible benefits of staking crypto.
Final Take
Staking crypto has both positive and negative consequences. The prospect of high yields for little to no effort makes the endeavor worthwhile for risk-taking individuals. For the average crypto investor, however, exchanges are the best course of action for crypto staking.
Crypto Staking FAQs
Here are the answers to some questions people ask when considering staking crypto.- Is staking crypto worth it?
- Whether or not staking crypto is worth it will depend on an individual's risk tolerance. Risk-averse crypto earners may prefer to maintain ownership of their assets without putting them at risk. On the other hand, risk-takers would likely be more than happy to stake their crypto for higher potential returns.
- Can you make money by staking crypto?
- Yes. Staking crypto can be extremely profitable, and it is an excellent way to earn passive income for long-term believers in crypto who are indifferent to price swings. However, it also comes with the risk of losing money, so stake cautiously.
- What is the risk of staking crypto?
- The main risk of staking crypto is a sudden drop in the price of the underlying crypto that has been staked. Other risks include staking pools being hacked, which can result in total loss of the crypto asset staked.
- Can you lose crypto through staking?
- Yes. If a staking pool is hacked, the staked crypto can be lost entirely.
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- Cointelegraph. 2022. "Understanding staking pools: The pros and cons of staking cryptocurrency."
- CNBC. 2022. "Cryptocurrency luna crashes to $0 as UST falls further from dollar peg."
