What Is Crypto Staking and How Does It Work?

They say that the “buy and hold” strategy is the most profitable and safe for investors. The well-known Warren Buffett does not hide that he always follows this rule.

We will not argue on this score, but we note that this strategy can be pumped to increase your income at times in the case of cryptocurrency. Crypto staking will help in this.

Crypto staking is one of the new passive income sources among digital assets. It is enough to keep the crypto in your wallet to make a profit. The presence of cryptocurrency on balance allows you to become a member of the network to ensure the operability of its blockchain. For this, the project rewards the holder of staking tokens with cryptocurrency.

In this article, we will talk about what is crypto staking and how it works.

What is the most promising cryptocurrency in 2022? Read more here.

What is crypto staking?

Crypto staking is the retention of funds in an account, which facilitates operations in the blockchain and, at the same time, provides a reward. Such a system is widely used in those networks where the Proof-of-Stake (PoS) consensus mechanism is taken as a basis.

Unlike those blockchains that work based on Proof-of-Work (PoW) and check and add new blocks with the help of mining, here, the blocks are checked by mixing bets. Special equipment is not needed for this. PoS validators are selected depending not on their power but the number of coins in the account.

The user who has bet more coins has a better chance of becoming the next block validator. As for investments, investments in cryptocurrency are required here instead of ASIC. Proof-of-Stake provides an increased degree of scalability. This is one of the reasons that in the Casper update for Ethereum, this currency will switch from PoW to PoS.

Did you hear about crypto launchpads? Learn more here.

How does crypto staking work?

All cryptocurrencies are available for staking work on the Proof-of-Stake algorithm and coins for mining on Proof-of-Work. In mining, equipment (ASICs, Fermi, etc.) compete with each other to confirm new blocks. The higher their power, the more likely they will win the competition, and the miner will receive a reward.

In staking, the process of confirming blocks occurs at the expense of coins stored in the wallet. There is no need to buy equipment here, but it is enough to store coins. The more of them, the greater the probability of confirmation of the block and the higher the income.

In practice, everything works according to this principle. The exchange takes pictures every day to see if the corresponding crypt is on your wallet. Further, at the beginning of each month, the investor receives payments.

The amount of payments is calculated using the formula:

{the total amount of rewards multiplied by your ownership coefficient}

To find out your ownership coefficient, you need to divide your purchased coins by the total amount.

In general, to not bother with these calculations, you can just look at the approximate profitability percentage. It is indicated near each cryptocurrency.

Who are the crypto billionaires, and how do they gain their incomes? Read more here.

Types of crypto staking

The classification can be given according to several criteria. For example, if you take into account the way of organization, then you can:

Engage in staking independently, becoming, for example, a masternode. Script developers set the minimum allowable amount of crypt. The amounts are significant, so this way will not suit small crypto investors. For example, in Dash, only holders of at least 1000 coins can become a master node; taking into account the altcoin rate, more than $200,000 will be required. Another scheme of work is also possible when validators are selected randomly, but the presence of numerous crypts increases the likelihood of being elected.

Use a staking pool. A pool is an association of a group of crypto investors; they combine their coins, increasing the likelihood of being selected for validation. The income is divided proportionally according to the contribution of each of the pool participants.

Engage in tracking through crypto exchanges, for example, Binance. From an organizational point of view, this is the simplest option; there are also no problems with security.

Read more about Binance safety and privacy here.

Staking via profile platforms. Almost the same as in the case of exchanges, but the platform’s functionality is limited exclusively to blocking coins, and it is not intended for active crypto trading.

Depending on the storage method, crypts are allocated in one of several ways:

Hot staking. Communication is maintained between the participants; the crypt is stored in ordinary wallets.

Cold staking. Large holders use it. A feature of this type is the storage of altcoins in a hardware wallet; this gives the highest possible level of protection.

Also, the staking differs depending on the conditions under which the script is blocked:

DeFi staking. A promising direction, within the framework of this type, tokens blocked by the user are used to provide financial services to other people through smart contracts. It is more convenient to do this through crypto exchanges since exchanges independently monitor reliable DeFi projects, cutting off offers with excessive risk.

Fixed staking. It is so named because the term of blocking coins is known in advance. For example, on a Binance, the blocking period starts from 30 days. There are also boards with 60- and 90-day blocking. By analogy with a regular bank deposit, the user does not have the right to withdraw the crypt prematurely. Rather, he can do it, but he will lose all the accumulated income.

Flexible or indefinite staking. It differs in the absence of a strict limit on the term of blocking coins. Interest is accrued until the user decides to withdraw the crypt.

Advantages of cryptocurrency staking

Here are the advantages of cryptocurrency staking:

1. This is an easy way to earn interest on your assets in cryptocurrency.
2. You do not need any special equipment for cryptocurrency staking, unlike cryptocurrency mining.
3. You help maintain the security and efficiency of the blockchain.
4. This is more environmentally friendly than mining cryptocurrencies.

The main advantage of staking is that you earn more cryptocurrencies, and interest rates can be very high. You can earn more than 10% or 20% per year in some cases. So this is potentially a very profitable way to invest money. And the only thing you need is a cryptocurrency using the Proof-of-Stake model.

Staking is also a way to support the cryptocurrency’s blockchain in which you invest. These cryptocurrencies rely on the rates of their holders to verify transactions and ensure smooth operation.

Risks of cryptocurrency staking

There are several risks associated with cryptocurrency staking that you should be aware of:

1. Cryptocurrency prices are volatile and can fall quickly. If your frozen assets drop in value a lot, this may outweigh any interest you earn on them.
2. It may be necessary to lock your coins for a minimum period for staking. During this period, you cannot do anything with your frozen assets, for example, sell them.
3. If you want to unlock a cryptocurrency, the unlocking period can last seven days.

The most significant risk you face when staking cryptocurrencies is a price drop. Keep this in mind when you see that cryptocurrencies offer very high-interest rates. Many small crypto projects do so to attract investors, but the prices of such cryptocurrencies often fall. If you prefer less risk, you can choose cryptocurrency stocks instead of cryptocurrencies.

Although the cryptocurrency you have locked up still belongs to you, you need to unlock it before you can trade it again. To avoid unpleasant surprises, it is important to find out whether the minimum blocking period is set and how long the decoupling process takes.

Crypto staking VS. mining

Often on the internet, you can read opinions that mining will be replaced by crypto staking in the future. This may be due to several advantages of crypto staking.

1. Simplicity. The investor, as a rule, does not want to bother with anything. And there is no routine here; just buy coins and that’s it. In mining, everything is much more complicated. You need to calculate the profitability using calculators, buy equipment, and configure it all. The equipment must be constantly monitored, maintained, etc. In general, there are plenty of worries.

2. Fewer risks. There is only one risk, which is that the cryptocurrency rate may fall. However, in mining, the risk of equipment failure is also added.

3. Guaranteed profitability. In staking, the investor receives a return every month. You can calculate an approximate percentage of your earnings. Mining doesn’t even come close to guaranteed profitability; there may even be unprofitable months. In addition, some nuances cannot be calculated; for example, the price of electricity may increase.

4. Reduction of block reward to miners. For example, if you take bitcoin, halving will occur in 2022; all miners will earn exactly half as much. Already, mining has become unprofitable for many single miners, and they’ve disconnected their equipment from the outlet. Halving will further complicate the situation, and only large companies with very cheap or free electricity can remain on the market.

The list of the best coins to mine is here.

Several major cryptocurrencies for staking

Ethereum was the first cryptocurrency with a programmable blockchain that developers can use to create applications. Ethereum started using a Proof-of-Work model but is now moving to a Proof-of-Ownership model.

Cardano is an environmentally friendly cryptocurrency. It was based on peer-reviewed research and developed using evidence-based methods.

Polkadot is a protocol that allows different blockchains to connect and work with each other.

Solana is a blockchain designed for scalability, as it offers fast transactions with low fees.

Considering your income, it’s worth exploring these and other cryptocurrencies with staking. The Proof-of-Stake model turns out to be useful for both cryptocurrencies and crypto investors.

Cryptocurrencies can use the Proof-of-Stake model to process many transactions with minimal costs. Crypto investors also get the opportunity to receive passive income from holding cryptocurrencies.

Conclusion

Staking is a good way to earn passive money on cryptocurrencies. This investment method does not require any effort and, in a growing market, will bring the token owner an income higher than what banks provide. But, of course, there are always risks, the main one of which is the depreciation of the chosen cryptocurrency.