Key points
Staking is a process in which participants lock up cryptocurrency to maintain the security of a blockchain and receive rewards for doing so.
Staking is popular among cryptocurrency holders because it allows them to support their favorite blockchains and grow their holdings over time.
Staking is only available on certain blockchains that use the Proof of Stake consensus mechanism, such as Ethereum, Solana, Cardano, Avalanche, Polkadot, Cosmos, and many others.
While staking can bring in additional crypto assets, it is important to consider potential risks, including loss of funds due to volatility, slashing, or technical glitches.
What is Staking in Cryptocurrency
Staking is a process in which users lock up their cryptocurrency to maintain the security and operation of the blockchain network. In return, stakers receive additional cryptocurrency, which is why staking has become a popular source of passive income among investors. Staking is an important part of Proof of Stake blockchains.
What is Proof of Stake
Proof of Stake (PoS) is a consensus mechanism used to verify and validate transactions. It was created in 2011 as an alternative to the Proof of Work (PoW) mechanism in the Bitcoin blockchain.
The main difference between PoW and PoS is that PoS does not rely on mining, which requires a lot of resources. In PoW networks, miners must use computing power to solve complex mathematical problems. In PoS networks, miners are replaced by validators, who are selected based on the amount of coins they are willing to stake.
How Cryptocurrency Staking Works
Staking is the act of locking your cryptocurrency to participate in the activities of a blockchain network. The process itself may differ depending on the blockchain, but it is usually structured as follows:
1. Selection of validators: In PoS blockchains, validators are selected based on a combination of factors including the number of coins staked, the length of time they have been staked, and sometimes random selection by users.
2. Transaction verification: The selected validator is responsible for verifying and confirming transactions so that network participants can be confident that they are valid.
3. Block creation: Verified transactions are grouped into a block, which is then added to the blockchain, which acts as a distributed ledger.
4. Rewards: As a reward for their work, validators receive a portion of the transaction fees and, in some cases, new cryptocurrency coins.
Types of staking
There are several approaches to staking. They differ in the level of technical knowledge and the amount of cryptocurrency that the user contributes. Let's list the most common types of staking:
Individual or self-staking: You can run a validator node yourself. This option gives you the most control, but requires significant technical knowledge and responsibility. If you make a mistake, you can lose your assets due to slashing penalties.
Staking on an exchange: Some cryptocurrency exchanges offer staking services. This is the simplest form of staking, which does not require any technical knowledge. This method is also called “staking as a service”. For example, you can earn daily rewards by staking ETH on Binance.
Delegated staking: You can delegate your coins to a trusted validator or staking service so you don’t have to deal with the technical aspects yourself. Some altcoins offer this option directly in their native crypto wallets.
Staking pools: Staking in pools allows you to deposit coins together with other users. This increases your chances of receiving rewards without running your own node.
What is a staking pool?
A staking pool is a group of cryptocurrency holders who pool resources to increase their chances of validating blocks. Members of such a pool can earn staking rewards proportional to their contribution to the pool.
This option is especially useful for smaller investors who don’t have enough coins to meet the minimum staking requirements. However, it’s important to do your research and choose a reputable staking pool before investing, as fees and security levels can vary.
Comparison of Staking and Liquid Staking
Liquid staking is a more advanced form of staking that allows users to stake assets without losing liquidity. In regular staking, assets are often locked and become inaccessible during the staking period. However, liquid staking allows you to use the assets in the stake and simultaneously receive staking rewards.
Most often, users are given liquid staking tokens (LST) for this, which represent the assets in staking. For example, when you stake ETH on Binance, you get WBETH in return, which you can sell, buy, or use in other services without losing the reward for staking ETH. And for staking ETH on the Lido platform, you get LST called stETH.
Some platforms implement direct staking without issuing LST. This approach is called native liquid staking. An example is ADA on the Cardano blockchain. Thanks to this innovation, users get the benefits of staking while maintaining the freedom to use their assets.
Benefits of Cryptocurrency Staking
Staking allows you to earn money from unused assets. You will receive rewards for helping to secure your favorite blockchain networks. Cryptocurrency staking is especially popular among long-term cryptocurrency holders who want to get the most out of their assets.
Why stake assets?
Earn rewards: By staking your assets, you earn additional cryptocurrency, so staking can be a great source of passive income.
Support the network: By staking, you help secure the network and ensure it operates properly.
Governance participation: In some networks, staking gives voting rights and allows you to influence the future development of the network.
Energy efficiency: Unlike mining in PoW blockchains, staking requires much less energy, making it a more environmentally friendly option.
Is it worth staking cryptocurrencies?
Yes. Staking is generally a good source of passive income from unused crypto assets, especially if you plan to hold assets long-term and want to support a project. However, the potential benefits and risks may vary depending on the cryptocurrency and platform you choose.
For example, if a DeFi staking platform offers high returns but does not provide adequate security, your assets may be stolen or lost. In addition, the rewards may be affected by market volatility, which may lead to losses.
Risks of Staking
Staking can be profitable, but it also comes with potential risks. Let's look at them below:
1. Market Volatility: If you stake a cryptocurrency whose price drops significantly during your time staked, the staking rewards may not be enough to cover your losses.
2. Slashing risk: If you become a PoS validator, you need to follow certain rules. Validators who act maliciously or do not maintain the node properly may be penalized and lose their staked funds.
3. Risk of centralization: If a small number of validators control the majority of the staked coins, this can lead to centralization and compromise the security of the network.
4. Technical risk: Some types of staking require you to lock your coins for a certain period of time. If technical issues occur, such as smart contract errors or software failures, this could result in loss of access or freezing of funds.
5. Middleman risk: If you stake through a third-party service, you are trusting them with your funds. If the platform is hacked, your funds could be at risk. DeFi platforms can come with similar risks, especially when you need to provide full access to your crypto wallet.
How to Stake Cryptocurrency in 2024
1. Choose a PoS cryptocurrency: Choose a cryptocurrency that supports staking. Carefully study the staking requirements and rewards.
2. Create a wallet: Use a wallet that supports staking. The safest ones to use are popular wallets such as Binance’s Web3 wallet, MetaMask, and TrustWallet.
3. Start staking: Follow the network's instructions to deposit coins: run a validator node, delegate assets to a validator, or join a staking pool.
Remember that the Web3 wallet is just an interface for staking services and does not control the underlying protocols. Therefore, it is worth choosing well-established blockchains such as Ethereum and Solana, and doing your own research before investing.
How is staking reward calculated?
Staking rewards depend on the network and the following factors:
The amount of cryptocurrency you have staked
Your staking duration
Total number of coins staked
Network transaction fees and coin inflation rate
Some blockchains distribute rewards as a fixed percentage, making it easier to predict revenue. Rewards are also often measured based on their expected annual return, or annual percentage rate (APR).
Is it possible to withdraw cryptocurrency from staking?
In most cases, you can withdraw your cryptocurrency from staking at any time. However, the exact mechanisms and rules depend on the specific staking platform. Sometimes, early withdrawal of assets may result in partial or complete loss of rewards. Check the staking rules on the chosen blockchain or platform.
In 2023, the Ethereum Shanghai upgrade allowed the withdrawal of assets from staking on the Ethereum network. With the upgrade, ETH holders can automatically receive staking rewards and withdraw locked ETH at any time.
Why can't all cryptocurrencies be staked?
Staking is only available in PoS blockchains. Bitcoin and other cryptocurrencies that operate on the PoW consensus mechanism cannot be added to it. Even in PoS networks, not all cryptocurrencies support staking, as they may use different mechanisms to motivate users.
In conclusion
Staking cryptocurrency allows you to participate in blockchain networks in exchange for rewards. However, staking comes with certain risks, including market volatility, middleman risk, slashing risk, and technical risk. If you want to contribute to the blockchain ecosystem and earn passive income, carefully study the types of staking and available networks.
Recommended reading
What is liquid staking?
What is Proof of Stake (PoS)
Liquid Staking Tokens (LST)
Proof of Work (PoW) или Proof of Stake (PoS)
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