Key aspects
Staking is when you lock up cryptocurrency to maintain the security and functionality of a blockchain and in return, earn rewards.
Popular among cryptocurrency holders, staking allows investors to support their favorite blockchains while increasing their holdings over time.
Staking is only available on certain blockchains that use the Proof of Stake consensus mechanism. Examples include Ethereum, Solana, Cardano, Avalanche, Polkadot, Cosmos, and others.
While staking can increase your cryptocurrency holdings, it is important to be aware of potential risks such as losing funds due to volatility, slashing, or technical glitches.
What is staking in the crypto world?
Staking is the process of locking up a certain amount of cryptocurrency to help secure and support the operations of a blockchain network. In doing so, stakers are rewarded with additional cryptocurrency, making it a popular method for investors to earn passive income. 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 used by Bitcoin.
The main difference between PoW and PoS is that PoS does not rely on mining, which is a resource-intensive process. Instead of miners using computational power to solve complex mathematical problems, PoS networks rely on validators selected based on the number of coins they own and are willing to stake.
How does cryptocurrency staking work?
In short, staking involves locking up your cryptocurrency to participate in the activities of a blockchain network. The process may vary depending on the blockchain, but here's how it typically works:
1. Validator Selection: On PoS blockchains, validators are chosen based on a combination of factors such as the number of coins staked, how long they have been staked, and sometimes a random selection.
2. Transaction Validation: Once selected, the validator is responsible for checking and validating transactions, ensuring they are legitimate.
3. Block creation: Validated transactions are grouped into a block, which is then added to the blockchain, which is essentially a distributed ledger.
4. Rewards: As a reward for their work, validators earn a share of transaction fees and, in some cases, new cryptocurrency.
Types of staking
Depending on your level of technical expertise and the amount of crypto you want to stake, there are different ways to do so. Common staking types include:
Solo or self-staking: This involves running a validator node. This option gives you the most control, but requires a lot of responsibility and technical knowledge. If you don't do it correctly, you can lose your assets due to slashing penalties.
Exchange staking: Some cryptocurrency exchanges offer staking services, which is the easiest way to stake without having to deal with the technicalities. This method is also known as “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 to handle the technical aspects. Some altcoins offer this option directly from their native crypto wallets.
Staking Pools: Pool staking allows you to stake coins with other users, increasing your chances of earning rewards without the need to run your own node.
What is a staking pool?
A staking pool is a group of cryptocurrency holders who combine their staking power to increase their chances of being selected as validators. By placing their resources into a pool, participants can earn staking rewards proportional to their contribution to the pool.
This option is especially beneficial for smaller investors who may not have enough coins to meet the minimum staking requirements. However, it is essential to do your research and choose a reputable staking pool, as fees and security can vary.
Staking vs. Liquid Staking
Liquid staking is a new form of staking that allows users to stake their assets without losing liquidity. Unlike conventional staking, where assets are typically locked and inaccessible during the staking period, liquid staking introduces mechanisms that allow users to maintain liquidity while still earning staking rewards.
A common approach is to issue Liquid Staking Tokens (LST), which are tokens that represent the staked assets. For example, when you stake ETH on Binance, you will receive WBETH in return, which you can trade or use elsewhere without compromising the rewards of ETH staking. Similarly, when you stake ETH on a platform like Lido, you will receive LST called stETH in return.
There are also platforms that allow direct staking without issuing LST, which is known as native liquid staking, as seen with ADA on the Cardano blockchain. This innovation offers users the benefits of staking, while retaining the ability to use their assets freely.
The advantages of staking your cryptocurrencies
Staking is a way to make your idle assets work for you, meaning you can earn rewards while helping secure your favorite blockchain networks. Cryptocurrency staking is especially common among long-term cryptocurrency holders who want to make the most of their holdings.
Why Staking?
Earn rewards: Staking allows you to earn additional cryptocurrency by storing your coins in a staking wallet, which can be a great way to generate passive income.
Supporting the network: By staking, you help protect the network and ensure its proper functioning, while contributing to its overall health.
Participation in governance: On some networks, staking gives you voting rights, allowing you to influence the future direction of the network.
Energy efficiency: Unlike PoW mining, staking requires much less energy, making it a more environmentally friendly option.
Is cryptocurrency staking worth it?
Yes. It is generally worth staking your idle crypto assets to generate passive income, especially if you are a long-term holder and want to support the project. However, the potential rewards and risks may vary depending on the cryptocurrency and platform you choose.
For example, if a DeFi staking platform offers high returns but provides no security, your staked assets could be stolen or you could lose them. Market volatility is another risk factor that can offset rewards or cause losses.
Staking risks
While cryptocurrency staking can yield rewards, it also comes with risks. Potential risks of staking include:
1. Market volatility: If the price of the cryptocurrency you are staking drops significantly, there is a good chance that your staking rewards will not be enough to cover your losses.
2. Risk of slashing: If you become a PoS validator, you must ensure that your staking operations work as intended. Validators who act maliciously or fail to maintain their node may be penalized, resulting in the loss of staked funds.
3. Centralization risk: If a small number of validators control the majority of staked coins, centralization could occur, which could threaten the security of the network.
4. Technical risk: Some types of staking require locking your coins for a specific period. Technical issues, such as smart contract or software errors, can result in loss of access or freezing of funds.
5. Third-party risk: If you stake through a third-party service, you are trusting other people with your funds. If the platform gets hacked, your funds may be at risk. DeFi platforms can also involve similar risks, especially when you are asked to grant full access to your crypto wallet.
How to Stake Cryptocurrencies in 2024
1. Choose a PoS cryptocurrency: Select a cryptocurrency that supports staking. Make sure you understand the staking requirements and rewards.
2. Set up a wallet: Use a staking-friendly wallet. It's safest to use popular wallets such as Binance's Web3 Wallet, MetaMask, or TrustWallet.
3. Start staking: Follow the network instructions to stake your coins, either by running a validator node, delegating to a validator, or joining a staking pool.
Please note that Web3 wallets are just interfaces for staking services and do not control the underlying protocols. Please give preference to well-established blockchains such as Ethereum and Solana and do your own research before taking financial risks.
How are staking rewards calculated?
Staking rewards vary by network and are usually determined by factors such as:
The amount of cryptocurrency you are staking.
The length of time you have been staking.
The total number of coins staked on the network.
Network transaction fees and coin inflation rate.
On some blockchains, rewards are distributed as a fixed percentage, making it easier to predict your earnings. Staking rewards are often measured by their estimated annual returns, i.e. the Annual Percentage Rate (APR).
Can staked cryptocurrencies be withdrawn?
Generally, yes. You should be able to withdraw your staked cryptocurrencies at any time. However, the exact mechanisms and rules will vary from one staking platform to another. In some cases, withdrawing staked assets early may result in partial or full loss of staking rewards. Check the staking rules of the blockchain or platform you are using.
It is worth noting that Ethereum’s 2023 Shanghai upgrade enabled staking withdrawals on the Ethereum network. The upgrade allows ETH stakers to opt in to automatically receive their staking rewards and withdraw their locked ETH at any time.
Why can't you stake all cryptocurrencies?
Staking is specific to PoS blockchains. Cryptocurrencies such as Bitcoin, which operate on a PoW consensus mechanism, cannot be staked. Even within PoS networks, not all cryptocurrencies support staking, as they may use different mechanisms to incentivize participation.
Conclusions
Cryptocurrency staking offers a way to participate in blockchain networks while earning rewards. Still, it is critical to understand the risks involved, including market volatility, third-party risks, slashing, and technical risks. By carefully choosing your staking method and thoroughly researching the network, you can effectively contribute to the blockchain ecosystem and potentially earn passive income.
Further reading
What is liquid staking?
What is Proof of Stake (PoS)?
Liquid Staking Token (LST)
Proof of Work (PoW) vs. Proof of Stake (PoS)
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