If you are contemplating investing your crypto in platforms other than mining and exchangers for their saturation, considering crypto staking might work for you. Staking your coins in crypto is another profitable and potential alternative that can get your assets into the wallet and makes the transactions smooth for the most part. These investments are relatively new and include some perks when it comes to saturation, interests, fees, and convenience in the market.
However, investing in this version demands a keen sense of the market and inflation as there is a critical risk involved in the market. So, if you are afraid of the dropping prices of crypto and are confused about whether you should or shouldn’t invest in staking, need not worry. To save your day, I have brought together a detailed guide on what is staking in crypto, its nitty-gritty details, and a cost-benefit analysis that can help you in making a firm decision. So, don’t waste more time, and let’s get in.
In simple words, crypto staking implies locking up the crypto holdings to earn financial interests or rewards. It works through a mechanism of blockchain technology that verifies these transactions and stores the data of the attained cryptocurrencies. Hence, through the process of staking, you are validating those transactions.
First of all, the participants are expected to pledge their earned rewards to the protocol from where it chooses to validate their transactions. Here, the rule of thumb says the more the coins, the more you have chances of you to be chosen as a validator. Most commonly, all the rewards earned from staking are the same type of cryptocurrency. However, to start the process, you would need cryptocurrency as a proof-of-stake.
What is Proof of Stake?
If you have some previous experience with Bitcoin, you most probably know what is PoW or proof of work. In simple words, it is a mechanism that allows the transaction to be stored in different blocks that are then linked together to design different blockchains. For instance, miners or investors are expected to solve some puzzles and earn the reward that will get them to the next blockchain.
It is a reliable and transparent mechanism that allows you to decentralize your cryptocurrency and helps you in arbitrary computation. These complex puzzles are designed to keep the network secure and supported, making the entire process of computation justifiable. Likewise, to decentralize the consensus without any cost involved, you will have to enter a pool of stakes.
The main idea of this pool is that participants involved in the process can lock their coins after certain intervals that let them validate to the next block and gain more rewards. Hence, the simple rule is that the chances of you being chosen for the validation are directly proportional to the amounts of coins you are going to lock up. Hence, to get chosen fast, just lock as many coins as you want.
Therefore, instead of solving the required puzzle, you are blocking a new chain with your ability to lock more coins. So, in this way, there is enhanced scalability in the blockchains. This is one of the reasons why the Ethereum or ETH network has shifted from PoW to PoS. Nowadays, the technical upgrade version of this currency is also known as ETH 2.0.
Who Created Proof of stake?
The early design of PoS or proof of stake goes back to Sunny King and Scott Nadal, who in their research, came up with the idea of peer-to-peer design of cryptocurrency. This was derived from Satoshi Nakamoto’s design of Bitcoin which was created with a hybrid model. In addition, this network was launched with a hybrid mechanism (a combination of PoS and PoW) that offers mint as the initial supply. However, the sustainability of the network is questioned, making it the reason it didn’t become famous.
What is Delegated Proof of stake?
After the failure of DoS in network security, a new version was launched of this mechanism, designed by Daniel Larimer in 2014, who later referred to it as DPoS or Delegated Proof of Stake. It was initially used in BitShares, and soon developed the model that was incorporated in Steem and EOS (developed by Larimer). This mechanism allows investors to get the voting power which would then translate in the number of coins you can keep.
Here, you can use these votes to get the number of delegates who would manage your blockchains for keeping the security and computational consensus in contact. The rewards collected in this mechanism help you in electing delegates that would, in turn, divide the rewards as per your dedicated individual earnings and investments. The thing that gives this model an edge is that it allows users to hold consensus at a lower number of investments.
Therefore, with this version of the DoS mechanism, you are getting relatively more network protection, making it protected and supported. However, it is equally important to note that it can cause you to allow a degree of decentralization as the network is dependent on small validating nodes and the operation is based on some elected participants and the governance. All in all, the governing parameters are set in the process of reaching a consensus that can make the system lacking in decentralization.
What is Cold Staking?
Cold staking is the process in which staking on the crypto wallet is not directly connected to the internet. Thereby, this method is done through a hardware wallet that costs you a little fee to keep your earned rewards safe and secure offline. Also, with this type of staking, you can keep your coins or move them easily from one place to another. It is primarily used by experienced or large stakeholders who need maximum protection for their funds. It further supports the network quite well.
How Does it Work?
Staking in crypto is not at all challenging, however, it can be confusing at first. Here are some common steps you would need to know before you venture into crypto staking;
Buy the CryptoCurrency That Uses Proof of Stake
The first thing you will notice in the process is that not all types of cryptocurrencies offer stake. For validation of your transaction, you need a specific cryptocurrency. Here are some popular alternatives you can go for;
- Ethereum or ETH was the first-ever cryptocurrency that possessed a programmable blockchain. The developers used this program to create apps that started out as proof of stake. The minimum requirement for this currency is at least 32 ETH with a return rate of 5-17 % each year, making it hugely popular.
- Cardano or ADA is another eco-friendly alternative that was created on the basis of research and developments in the methodology of transactions. It is a multi-layered version that helps you with peer-based investments. As per current market rates, this has an average rate of 24% interest.
- Polka Dot or DOT is known as a protocol that allows a variety of blockchains to connect with one another to validate the transactions of staking.
- Cosmos or ATOM is also referred to as the “Internet of Blockchain”. As the name suggests, it is designed with better networking and security that allows you to transact more earnings and invest with enhanced protection.
- Solana or SOL is another blockchain that helps you in scalability. It is designed with low fees and fast transactions, making it hugely popular.
- EOS is another decentralized program that helps you with high-interest rates and enhanced blockchains. The average increased earnings of this currency are 3.2% per year.
- Last but not least, Tezos or XTZ is an open-source blockchain network that offers better security and offers network protection. The expected interest rate on this currency each year is around 6% as per the current market.
Here, before investing, it is equally significant that you know more about proof-of-staking so that you can start with reliability and transparency.
Now, Transfer Your Crypto to the Wallet
Once you know where to invest, it is time to exchange the purchases. Some exchanges have their own dedicated staking programs that offer selected cryptocurrencies. If your exchange has this function, you can always stake directly into that one. In contrast, you will have to move your transactions into the blockchain wallet. These wallets are also known as crypto wallets and are designed to keep your earnings secured.
If you want to make the process faster, it is ideal that you download a free software wallet that can keep your earnings. For enhanced reliability, you can go for hardware wallets that are available for purchases. From there, choose the option of deposit crypto and select the type of currency you are going to transact. Next, you will get a wallet address that can help you in withdrawing the cryptocurrency. For this purpose, you can copy-paste this address to transfer these earnings.
Join the Staking Pool
Despite the fact that staking uses different types of currencies, most of these have their own pools. These pools are designed to combine all the traded crypto earnings so that you get a better chance of earning more currency. Based on the evidence-based research, here are some of the things you need to consider before investing in crypto;
Reliability: The first and foremost thing here to consider is reliability as while staking, you need a server whose server is never down. Hence, go for the one that has 100% uptime.
Fees: Another thing you should look into is the reasonable fees that are required to keep your rewards. On average, anything between 2 and 5% is common for crypto pools.
Size: It is also important to note that small pools have fewer chances to validate the blockchains. However, they have an edge in providing you with large rewards as there is a minimal distribution between users. Yet, it is not ideal to invest in too small pools as these can potentially fail. When it comes to large pools, these have a limited amount of reward you can earn, making them oversaturated. So, all in all, it makes sense to go for medium-sized pools as they have the best saturation level for rewards.
Now, once you have found the right pool, it is time you start staking in crypto through the wallet and earn as many rewards as you want.
Advantages of Staking in Crypto
Similarly, before venturing into this investment, it is only logical you have done the cost/ benefit analysis of the process. Here are some of the benefits of starting with staking in the cryptocurrency;
- First of all, it is an easy way to hold your transactions and keep your earnings in the holding.
- Also, increasing your tokens can increase the process of new blocking and can offer you high chances of earnings.
- Another thing that makes it worthy of your investment is that it is less resource-intensive. This process involves minimal resources to increase your holdings.
- It doesn’t demand any equipment for staking unlike popular options like crypto mining.
- The blockchain mechanism in the crypto staking process helps you in maintaining the overall safety and security of your earnings with reasonable fees.
- Here, voting rights and participation in different groups or blockchains can aid you in getting the necessary clout, which, in turn, can increase your interests and earnings.
- It is also eco-friendly in comparison to crypto mining.
On the whole, crypto staking allows you to earn more currency with a generous interest rate that can help you in unlocking new achievements. On average, it is a potential way of earning at least 10 or 20% more per year, making it a profitable deal to invest your money. Also, with this process, it is easy to validate your earnings and keep everything smooth.
Disadvantages of Staking in Crypto
Apart from advantages, it is important to note that this process can also have some risk value that can influence your decision of investment. To save your day, here are some things you need to consider;
- The first and most understandable thing to note is that cryptocurrencies are extremely volatile and can drop absolutely quickly. So, if your staked earnings have suffered a loss, you will also get an instant drop in your investment and the rewards you earn from these investments.
- In addition, during the staking process, you lock up your currency for a minimum amount of time. So, at this time, you are not allowed to do anything with your assets, for instance, investing them or selling them somewhere else.
- During this process, you also have to beware of slashing. This implies that, while you are investing outside of the exchange programs, you can make mistakes that can cost you heavy penalties. This reduces your funds to a great extent and can influence your overall earnings.
- If you have made a decision to unstake your cryptocurrency, you would need to wait for a certain period such as seven days or even longer.
All in all, the most prevalent and critical risk of staking in crypto is that its prices go down instantly. Hence, the stakes involved in the process are high, yet when successful, provides you with high rewards. For instance, some projects would entice the investors with high earnings and interest rates, however, soon their prices go down and you have nowhere to go.
How Are Staking Rewards Calculated?
Well, there is no simple answer to this question. This is because each blockchain network is equipped with a number of different ways to calculate the rewards. For instance, some exchange programs use a block-by-block model that has its own configuration mechanism. Here are some things that are taken into account while calculating these rewards;
- The number of coin validators is staking.
- The time period validator has been actively staking into crypto.
- It further depends on how many coins have investors staked in the network system.
- The inflation rate in the market.
In addition, for other commonly used networks, staking rewards come with fixed percentages that are distributed to investors as compensation for inflation. Here, another thing to note here is that inflation encourages investors to spend their coins in a process that increases the usage of cryptocurrency on average. This helps the validator calculate the staking rewards just perfectly.
How to Stake in Binance?
Instead of going for staking pools, you can also go for Binance to hold your coins. In this way, there are no fees included and you can enjoy all the perks that come with Binance. Hence, for this purpose, all you need to do is hold you coins that you have earned from PoS on this platform and make sure all the prerequisites are fulfilled. In this method, all the rewards are divided at the start of the month. You can also keep the track of your tab and rewards on the front page of each project.
How to Stake Crypto in Five Steps?
To start crypto staking, it demands investors to know every knit and grit of the process, so that they can decide what and where they want to stake. Here are some simple steps that can help you in staking in crypto;
- First of all, it requires you to choose the right coin to stake. For this purpose, it is absolutely necessary that you know which type of currency suits you best as an investor.
- Now, it is equally important that you know the basic prerequisites of starting the staking process. For instance, a minimum of 32 ETH is needed to start your first staking earning.
- After that, you can put your earnings in either a software or hardware wallet to directly start transacting the money.
- Once you have chosen the right pool for investing, you are done and can start staking as soon as possible.
Why not all cryptocurrencies have staking?
If you have been investing crypto in different platforms, it is most probable that you know the staking only operates on the currencies that are compatible with the proof-of-stake or PoS model. For instance, this mechanism introduced Bitcoin and allowed you to invest in staking. Some common currencies you can invest in the process are Peercoin, Ethereum ETH, EOS, Tezos XTZ, Cosmos ATOM, and Cardano ADA.
Is staking crypto safe?
Well, although there are some risks involved in the process of crypto staking, it is inevitable that you are getting equal perks and benefits. The most prevalent risk in the entire process is that the prices in this method can be volatile and can drop instantly. Therefore, if your stakes have suffered a loss, it is most probably that your rewards will have a huge impact. However, apart from this, you are getting many advantages like transparency, ease, affordability, and reach.
In the end, if you are contemplating investing your crypto in platforms other than mining and exchangers for their saturation, considering crypto staking might work for you. If you are afraid of the increasing drop in the prices of crypto across the market, this detailed guide on what is staking in crypto includes a comprehensive detail of the platform, its basic requirements, costs/benefits, and some viable alternatives that can help you in making a firm decision of investment.
Wrapping up, I wish you the best of luck with your future investment venture into the crypto market.