What is crypto staking?
Staking is seen as the crypto world’s equivalent of earning interest or dividends by holding onto crypto assets.
For example, when you deposit a certain amount of money in a savings account, the bank utilizes the money to run their lending business and earns interest. In return for locking up your money, you receive a portion of the interest as your profit.
Likewise, when you stake your digital assets, you are basically locking up your coins to support a blockchain network, its security and transaction confirmation. In return, you potentially earn a profit which is calculated in percentage yields. Your profit is realized by earning additional coins, tokens, and/or voting rights.
What cryptocurrencies you can stake?
Staking is only possible with cryptocurrencies that follow Proof-of-Stake (PoS) consensus mechanism.
At this point, it is worth taking a look at the Proof-of-Stake (PoS) as well as Proof-of-Work (PoW) consensus mechanism.
Blockchain running on PoS (like Ethereum) requires the users to simply own the token. The more tokens a user holds, the more voting power he/she gains in validating the blockchain. In this process, no complex or electricity-hungry computer setup is required.
Blockchain running on PoW (like Bitcoin) requires ‘miners’ who maintain a huge network of computers to validate each block after completing a complex mathematical algorithm. This mechanism is not energy efficient as it consumes a large volume of energy.
Cryptocurrencies you can stake include:
How can you start staking?
Your first job is to own enough digital assets that can be staked. Then you need to transfer the coins from the exchange or app to the account that allows staking.
A few crypto exchanges like Coinbase, Binance and Kraken allow staking on their platform. Some platforms, known as staking-as-a-service platforms, can help you to maximize your return.
Some mentionable platforms are:
- MyContainer &
There are 2 more options for staking other than using an exchange. These are mentioned below:
Join a pool
Investors usually join a ‘staking pool’ when they can’t find an exchange that supports their desired token or when they can’t fully trust the exchange.
The ‘staking pool’ is run by a third-party user and you connect your token with their pool using a crypto wallet. To maximize the staking rewards, crypto traders combine their funds in these staking pools.
Remember, any coins you delegate to a ‘staking pool’ are always in your possession. You have the right to withdraw the staked assets. However, there might be a waiting period (usually days/weeks). The waiting period depends on the type of blockchain network.
Be a validator
This basically means creating an infrastructure for staking. As understandable, this method is complicated and expensive as it requires a heavily configured computing system, advanced software and a blockchain’s full transaction history. Joining the pool or using an exchange doesn’t have this kind of requirement.
How much can you earn with crypto staking?
Investors who want the potential for sustainable earnings over a long period of time might consider staking.
Depending on the type of cryptocurrency/coin you stake, network conditions and the mechanism you use–staking rewards vary.
The Annual Percentage Yield (APY) of different exchanges can also give you a good indication. In January 2022, the APY for Binance was 4.5% and above, Coinbase reported an APY of 4% and Ether’s APY was 4.5%.
A major differentiator, there are no guarantees like FDIC insurance while staking digital currency to earn yield.
Staking rewards can change over time. However, you can maximize your return with a staking pool that takes low commission fees and allows more block validation options.
Advantages of crypto staking
The primary benefit is you can potentially earn more without doing much. All you need to do is to hold as many coins as you can. It may be a profitable method to invest your money and generate passive income. Some other advantages include
- Unlike crypto mining, you don’t need any equipment.
- More environmentally friendly compared to crypto mining
- The security and efficiency of the blockchain network are ensured through staking
Risks of crypto staking
The volatility of the crypto market is one of the major risks of crypto staking. There are some other risks as well.
- No Guarantees of any yield
- No Insurance Coverage
- Not FDIC Insured
- If you want to withdraw your assets from a staking pool, you must pass the waiting period before getting your coins back, and fees may apply to access coins.
- For some coins, there is also a minimum lock-up period.
- There is a counterparty risk of the staking pool operator.
- Some staking pools are vulnerable to hacking. If any such incident happens there is little to no hope of compensation as these assets are not backed by insurance coverage.
To Sum Up Risk Vs Reward –
Crypto staking strategy is more suitable for long-term investors who are not bothered about short-term price fluctuations. Staking is only possible with cryptocurrencies that follow Proof-of-Stake (PoS) consensus mechanism.
As an investor, you can start staking with an exchange directly, by joining a pool or by becoming a validator.
With that said, there are also substantial risks associated with crypto staking. Risks include lock-up periods, Not FDIC Insured, no guarantees, no insurance coverage, counterparty risk, hacking—loss of staked assets.
It is strongly advisable to do your own research. Get to know the future, Get to Know Mannawealthmanagement.com
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