What is Crypto Staking?
If you’ve been in the crypto space for a little while now, you may have heard the term “staking.” You might still have some questions around what it means, how it works, the risks associated with staking, and which cryptocurrencies offer stalking rewards. Not to worry, in this blog post, we’ll go over the basics of staking for you.
But first, we’ll start by saying that crypto staking is the process of putting a set amount of cryptocurrency you already own as collateral to support the verification of blockchain transactions. Participants that offer up their crypto are rewarded for doing so.
Another way to think about it is that participants are incentivized to earn rewards by maintaining the integrity of the blockchain without a centralized party. While staking is a great way to build your cryptocurrency portfolio, it does come with some risks.
Read on to learn more about how staking works, the risks involved, and how to get started.
What is Crypto Staking?
Like we mentioned above, crypto staking is the process of offering your crypto assets to help verify transactions. When you stake crypto, you are essentially putting your crypto up as collateral to help validate these transactions.
As a token of appreciation for your support, you earn rewards in the form of new crypto tokens. The amount of crypto you earn and the payout interval will depend on the crypto asset you stake, the length of time you stake it for, and the network’s overall health.
Not all cryptocurrencies can be staked though.
Only cryptocurrencies that use a Proof-of-Stake (PoS) algorithm can be staked. Proof-of-Stake is a consensus mechanism that requires participants to stake coins in order for them to be randomly selected as a validator of the network. Because participants have to give up their crypto assets, the network is thought to be less susceptible to hacks. After all, participants would not want to tamper with the blockchain, lose their crypto assets and the potential for rewards for the sake of hacking it.
PoS is one of different ways blockchains can process and verify transactions. Another method is called Proof-of-Work, which we will explain later. For now, keep in mind that PoS keeps the blockchain distributed, decentralized and secure.
Crypto staking can be a great way to earn passive income from your crypto holdings while helping to secure a blockchain network, which can be a noble contribution.
How Does Crypto Staking Work?
To stake crypto, you need to have a crypto wallet that supports staking. Not all crypto wallets or cryptocurrencies support staking, so be sure to check that your wallet allows you to stake.
Once you have a compatible wallet, you will need to deposit the cryptocurrency you wish to stake into your wallet. If you bought crypto from the Netcoins platform, then you’d need to withdraw your crypto from Netcoins and deposit them into your wallet.
Once your crypto is in your wallet and ready to be staked, the actual process of staking will vary depending on the crypto asset you are staking and the platform you are using and the directions provided to you. When your crypto is in your staking account it will start earning rewards.
You can choose to stake your crypto for a specific length of time. For example, you may wish to stake your crypto for one year to receive the maximum amount of rewards. Or, you may decide to unstake your crypto at any time (depending on the platform and blockchain) but doing so will likely forfeit any rewards that you have earned up until that point.
It’s important to note that crypto staking is not the same as mining. With mining, you use your computer’s processing power to help validate transactions on a blockchain rather than offer up existing coins. On the other hand, with staking, you are simply holding crypto in your wallet as collateral. You are not using your computer’s processing power or solving complex mathematical problems (like in mining).
Generally speaking, when you stake crypto, your crypto assets are used to help validate transactions on a blockchain network.
The Rewards You Get for Staking Crypto
The amount of crypto you earn from staking will mostly depend on the crypto asset you stake and the length of time you stake it for.
As an example, if you stake Cardano for 12 months, you may earn around 3% to 6% per year. But if you stake it for two months, you might make just 1% to 2%. If you stake a less well-known crypto asset like PIVX, you could earn over 6% per year. But you could expose yourself to more volatility and risk. That’s why it’s important to do your due diligence on ease of staking, reward pay-out, and risks involved.
It’s also important to remember that crypto prices and rewards are volatile and can go up or down at any time. A safer bet can be staking stablecoins tied to a fiat currency (like the U.S. dollar). With stablecoins, you can earn staking rewards without the worrying too much about volatility.
Often times, staking cryptocurrencies can also grant you voting rights over proposals, changes and the future direction of that crypto.
The Risks of Crypto Staking
Staking cryptocurrencies provides passive income to crypto stakers, but it also has some potential downsides.
When you stake crypto, you are essentially locking up your crypto asset for a period of time. This means that you cannot sell or trade your crypto while it’s being staked. If the price of crypto goes up while your crypto is staked, you could miss out on those gains. Inversely, if the crypto assets you have staked lose value, you could lose money.
Finally, if the blockchain network you are staking for experiences a hack or an attack, your crypto could be at risk too.
Which Cryptocurrencies Can You Stake?
You can stake all cryptocurrencies that use a Proof-of-Stake algorithm. Here are some of the largest (by market cap) crypto assets you can stake:
Why Can’t You Stake All Cryptocurrencies?
There are many cryptocurrencies you can stake and many you can’t. You can only stake cryptocurrencies with a blockchain that uses a Proof-of-Stake (PoS) consensus algorithm. So, you couldn’t stake cryptocurrencies that use a Proof-of-Work algorithm, (again, PoW is the process of solving very difficult computational problems every 10 minutes in order to release new coins into the ecosystem).
Here are some of the biggest cryptocurrencies by market cap that you can’t stake because they use a Proof-of-Work (PoW) mechanism:
Ethereum is included in this list because it is currently a Proof-of-Work cryptocurrency. However, you can stake Ethereum on some platforms in preparation for the Ethereum 2.0 launch which is expected to be soon.
In short, the main reason why you cannot stake all cryptocurrencies is that some crypto assets use different consensus algorithms. Some do not require staking because they use a Proof-of-Work consensus algorithm.
How to Stake?
You can start staking today! First, you buy a Proof-of-Stake cryptocurrency as listed above from a cryptocurrency trading platform, like Netcoins. Then you contribute an amount of the crypto to a staking pool on your wallet. The process can be simple and straightforward but varies by crypto, so make sure to do your own research.
By staking your crypto, you can earn rewards just by helping keep the network running smoothly!
Is Staking Right for You?
Crypto staking can be a great way to earn passive income from your crypto holdings. However, it’s important to remember that there are risks involved like we mentioned above.
Also, when you stake crypto, your money is tied up for a certain period of time. While your crypto is staked, you cannot sell or trade it. You need to ask yourself if the potential rewards are worth the risks and the time it is tied up in the staking agreement. So before you start staking crypto, make sure you understand the risks and how it all works. That way, you can decide if crypto staking is right for you!
In this article, we discussed crypto staking and how it works. We also looked at the benefits and risks of crypto staking. Remember, crypto staking can be a great way to earn passive income from your crypto. But, it’s essential to be aware of all the risks involved too.
Before you start crypto staking, make sure you fully understand these risks, how it works, and the time your crypto is “locked up” for your staking period (which can range from weeks to years).
Are you interested in staking cryptocurrencies? Learn how to buy cryptocurrencies with Netcoins so you can begin staking!
Writer, content marketing at Netcoins.