What is Crypto Staking and How to Do It?

In the crypto staking process you simply agree to give a portion of your crypto coins holding to the blockchain network.

These staked coins are then used by the blockchain network for the betterment of it such as for confirming the transactions made on it in a much better way.

In return, you get a high rate of interest on your staked crypto coins as a reward for facilitating the process of verification.

In a way, it is pretty similar to the banking system.

Here also you put in your money in the form of a fixed deposit and the bank uses that money for other purposes such as loaning out to the borrowers.

As a reward, you get interest on your deposits.

However, crypto staking is much better and more rewarding than making bank deposits, but you should keep in mind that there is some amount of risk involved in it which is not in the case of bank deposits.

This means that crypto staking may not be a viable option for you if you do not have a fairly high risk tolerance.

At this point you should also remember that each and every crypto coin available in the market may not allow you to stake them.

Therefore, you will also need to know and choose the particular coins that will allow you to do so.

Ideally, you can stake only those crypto coins that come with a Proof of Stake or PoS model.

This is because these coins are much more efficient and use very little energy when it comes to confirming transactions as compared to those crypto coins that follow the Proof of Work or PoW model.

Typically, crypto staking is considered to be a major part of the technology underlying a few specific types of crypto coins.

Here are some more details that you need to know in order to understand about crypto staking.

As you may know, blockchain is decentralized. This means that there is no middleman involved while making or validating a transaction.

However, these transactions are verified to find out whether or not they agree with the historic record of it that is maintained by all the computers over the blockchain network.

This is done by the users by collating the blocks of all recent transactions and submitting them so that these can be included into the immutable historic record.

The blocks of those users that are accepted are rewarded with a transaction fee in crypto coins.

The crypto staking process prevents errors and frauds in a transaction and the fact that the users put in some of their coins for making a proposal or voting for a new block to be accepted incentivizes them to play by the rules.

This means that, the more coins you stake, the better is your chance to earn transaction fees as rewards.

However, the risk here is that if your proposal has any incorrect or misleading information, you stand a chance to lose your stake. This process is called slashing.

Now, there are several ways in which you can stake crypto coins and the one you will choose will depend on the amount of research you do and how much technical as well as financial knowledge you have.

First, you must decide whether or not you actually want to stake your coins and use your computer to validate a transaction or leave the job to someone else to do it for you.

If you want to go ahead with it, then here are a few ways in which you can stake crypto coins.

You can do so by using an online crypto exchange. There are some popular crypto exchanges that will do it for you.

Do some research and you will be able to choose a reliable one.

You can also stake your crypto coins by joining a pool if you do not trust a crypto exchange in particular in making decisions on your behalf.

However, for this you will first need to know how you can use your crypto wallet to connect the coins to the pool of validators.

And, you can also become a validator if you have a proper computer and software and know the complications related to setting up a staking infrastructure.

It may involve a high cost and will also need downloading a copy of the entire history of the transactions made on the blockchain.

The Mechanism Behind

Crypto staking, as said earlier, can be done only with those crypto coins that support the Proof of Stake model.

The process works basically as follows:

You agree to put in some coins to a blockchain network along with others
The blockchain network chooses one from all as a validator for confirming the transactions and
When it is confirmed successfully, the validator is rewarded with a few new crypto coins.

Ideally, you will be rewarded in the same coins as you staked. And, the selection of a validator by the blockchain network depends on how much coin you have staked.

This means that the higher the number of coins put in, the better is the chance of you being chosen as a validator by the blockchain network.

Proof of Stake

You can stake only those coins with a Proof of Stake model. This model is far more popular and secure.

This model ensures that the confirmation of transactions is done in a decentralized way making the network highly scalable.

It eliminates the issues associated with the Proof of Work model.

In this model, the responsibility of confirming a transaction is given to only one participant.

This eliminates chances of disputes and easy tracking in case there is any incorrect information provided or wrong confirmation made.

It also reduces wastage of electricity in the process as well as its effect on the global environment.

The PoS model is highly efficient in carrying out large numbers of transactions through the system, making it faster.

Therefore, in today’s world the Proof of Stake seems to be a much better option.

Proof of Work

The Proof of Work or PoW model, on the other hand, needs the users to use extremely powerful computers.

They all compete with each other but only one gets selected to get the reward.

This is quite unfair because everyone has put in their time, effort, money and computing power and resources.

This also results in wastage of the already depleting resources of the planet.

Therefore, the PoW model is pretty inefficient and is criticized for global warming and increased carbon emissions.

Benefits of Crypto Staking

Crypto staking does not only benefit the blockchain network but also the investors and the environment as well in more than one way in spite of the risks involved in the process. Here are some of them:

The process is considered to be more environment-friendly because it uses PoS coins that use very little energy and does not need much computational power as well.

This makes it helpful for the environment and a better process than crypto mining.

It helps the blockchain network in processing larger numbers of transactions in a more efficient manner.

In addition to that, the process also provides more security to the network and system making the chances of frauds and errors happening nearly negligible.

Finally, you can earn more interest via crypto staking which will depend largely on the amount of coins you stake.

As said earlier, higher the number of coins you stake, the higher will be the returns.

Things to Consider

However, there are a few things to consider before you start crypto staking and these include much more than the inherent risks.

There may be some assets that allow staking and do not come with a fixed lockup period.

This means that if you use them you will be locking those coins for that particular time and will not be able to unlock it until that fixed period is over.

You will not be able to do anything even if you see that you are incurring losses on them.

This means that it will result in a huge impact on the overall investment.

Therefore, it is best to stake crypto coins in an asset that does not have any lockup period so that you can have full control on the coins you have staked.

If and when you earn a reward via crypto staking you may have to wait for a certain period to actually receive it.

Not all cryptocurrencies will have a daily pay out and those that do not often need a long time to process the rewards earned and give it to the stakers.

Then there is the risk that can be created by the validator especially when there is any mistake made in the process of confirmation.

If the validator is unaware of the process and cannot maintain 100% accuracy, you stand a chance to lose.

Your wallet may also be stolen if you do not pay proper attention to the security aspects of your coins that you have staked.

In order to prevent this you should always do proper research to use a trustworthy wallet that fits you and your crypto staking needs.

And, you also have the risk of staking in a market that is known to be extremely volatile.

There may be a sudden drop in the market price of the coins that you have staked which may eventually result in a huge loss.

Therefore, a proper and thorough research is necessary, once again.

You should also be well aware of the scam projects and stay away from them.

Educate yourself about these and you will be able to identify the false cryptocurrencies yourself.

Last but not least, you should be well aware of the type of coins you are allowed to stake.

Here is the list of some of the crypto coins that will help you earn a good passive income through crypto staking:

Tezos
Cardano
Terra
Solana
Polkadot and
Ethereum

You may be surprised to see Ethereum in the list knowing that it is not a Proof of Stake coin.

Well, this is because it has not adopted the Proof of Stake model yet and it is soon going to do it.

However, it still supports the crypto staking process, and quite well at it.

Bitcoin, on the other hand, may seem to be a notable and surprising exclusion.

Well, that is because this most popular and valuable crypto coin still uses the Proof of Work model for validating transactions.

Steps to Stake Crypto

Here are the steps that you should follow to stake crypto coins.

First, you will need to find out and buy the crypto coin that supports staking.

Make sure that you research well to minimize risks as well as know whether it has any minimum staking coin requirements.

You will also need to make sure that you have enough crypto coins in your wallet so that you can meet all the requirements of the blockchain network.

Then you should select a crypto wallet where you can keep the coins you have staked safely.

Finally, when you have selected your wallet you should transfer the minimum number of coins to stake.

Returns Offered

In crypto staking the kind of rewards you can expect will vary according to the number of crypto coins you have staked as well as the conditions such as the requirements of the particular blockchain network you have chosen to stake your coins in.

It will also depend on the specific method you have chosen to follow.

Ideally, the return on crypto staking can range anywhere from 4% and up to 10% annual percentage yield.

This is much higher than the average returns offered by the savings accounts in the United States which is usually between 0.5% APY and 0.06% APY in some cases.

Is it Worth?

Now the question is whether or not crypto staking is worth an option to earn some passive income.

Well, it is certainly not an option for all. Therefore, you should first find out whether or not you are fit for going ahead with crypto staking.

For that, you will need to find out the answers to a few common questions such as:

Do you need access to the crypto coins that you wish to stake – This is an important question because crypto staking will require committing your coins for a specific time period during which you will not be able to use them, access them, or trade them. If you really have to move your coins on a short notice, it is better to look at the terms of staking carefully before going ahead.
Are you okay with even lower returns – This is also an important question because the crypto market and assets are extremely volatile. This means that if the prices of the coins you have staked fall dramatically by 20% or more during the time of staking you will not get a reward as attractive as it looked when you predicted the returns on your investment.
How much do you believe in the project – This is another important question that will help you to decide whether or not you really want to stake your coins. If you are not confident about the prospects and cannot decide how good an investment it will prove in the long run, it is better to dump it.

If you find that the answers to all these questions are in your favor then crypto staking can prove to be a worthy option for you. Otherwise, think about something else.

Conclusion

You can make some good passive income via crypto staking. But, you will need to invest wisely to get a plausibly good return. This article will help you to do exactly that even if you cannot reach out to a crypto expert for investment advice.

Dominic Mondal

I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.