What Is Staking In Crypto: Advantages And How Does It Work?

When you own cryptocurrency, you get a lot of options to get passive income from them. One of these methods is crypto staking. Not all cryptocurrencies allow it, but the ones that do can prove to be a solid investment opportunity. 

Let’s explore this matter.

What Is Staking In crypto ?

Crypto staking is a process in which you stake your cryptocurrencies on a blockchain, confirm transactions and earn block rewards. You can stake your crypto on blockchains that run on the Proof-of-Stake (PoS) consensus mechanism. As a reward for your staked coins, you get the chance to earn newly minted crypto coins. 

For your better understanding, let’s understand how the Proof-of-Stake (PoS) consensus mechanism works. Unlike the Proof-of-Work (PoW) mechanism, which requires miners to validate blocks on the network by finding appropriate hashes, the PoS mechanism changes the game. 

Here, network participants or stakers need to stake an amount of cryptocurrency as collateral. In doing so, the blockchain will choose a staker based on the size of their holding and for how long the person is holding the stake. Upon selection, the participant can add the latest transaction data to the block and earn rewards in exchange. 

The reason why this mechanism asks its members to stake their assets is very interesting. The staked collateral is a safeguard to ensure that the validators act in good faith to the network.

 If they commit minor breaches in a protocol like being offline for an extended period, it will attract penalties. There is also a penalty if a validator confirms invalid transactions. The network will burn a portion of its stake. This is called a slashing event. 

Advantages Of Staking Crypto

Staking your crypto on PoS blockchains is an easy way to earn interest for your investment. It is a good long-term investment if you are not bothered by short-term price fluctuations. You can easily join a staking pool and participate in such activities. Each staking pool has a fee that it deducts for its services. You can opt for a staking pool with a low commission fee and a good track record of validating blocks. 

Another advantage of crypto staking is that opposed to active crypto trading; you do not have to research and find the correct time to buy or sell your assets. You simply have to stake and wait for the rewards to come.

Staking your crypto assets on a blockchain also increases its stability and security. It prevents the chances of a 51% attack and disruption of the entire network process. The more the number of validators, the more fluid will be its validation process. This will make dealings on the network much faster for you and everyone. 

Crypto staking is an environment-friendly way of investing your assets. PoW blockchains need a lot of energy to run their mining process. Governments of many countries have banned the mining of cryptos for their environmental hazards. Staking your crypto on PoS blockchains will help you earn from your investment, and at the same time, it also keeps environmental concerns away.   

How To Stake Crypto?

Before you know the process to stake cryptocurrencies, you must know that you cannot stake all crypto coins. It is due to the simple reason that their blockchains do not work on the Proof-of-Stake consensus mechanism. There are many cryptos that you can stake. Some of the profitable ones are:

• Ethereum 
• Cardano
• Luna
• Solana
• Polkadot
• Avalanche, etc. 

Different cryptos will have their staking mechanisms and minimum requirements. At the time of writing, Ethereum has a minimum stake of 32 ETH and Solana 0.01 SOL. 

To start staking, you must first decide whether you want to stake directly on your chosen cryptocurrency’s blockchain or through an exchange platform. When you opt for an exchange platform, your investments are staked by that platform, which leads to a huge staking amount. This makes your chances of getting block rewards a lot higher. 

On Ethereum, you get the options of Solo staking, Staking as a service, and Pooled staking. The last method has the least risk, but the staking pool also takes a percentage of your rewards as service fees. 

Crypto Staking On An Exchange Platform

The most hassle-free method of staking is investing via an exchange platform. There are various options available. Among them some are:

• Binance
• Coinbase
• Kraken
• BlockDaemon
• Figment
• EverStake
• MyContainer

For your convenience, let’s take the example of Coinbase. To stake crypto on this platform, do the following:

1. Download the Coinbase wallet
2. Choose a username
3. Store your recovery phrase by making multiple copies of it
4. Purchase Ether and transfer it to your wallet
5. Go to the Trade tab and buy an Ethereum Stake

There are some things which you need to keep in mind. They are:

• There is a transaction fee for all transactions, and you need to have enough Ether in your wallet for that purpose.
• Your recovery phrase is a vital thing to keep your crypto wallet safe. If you lose it, you will not be able to withdraw your assets from your wallet. Keep the copies of your recovery phrase safely stored in different locations. If anyone gets access to them, your digital wallet is compromised. 

You can also install the Coinbase Wallet app on your smartphone and stake your crypto assets. You can do it in the following way:

1. Open the app and go to the ‘Trade’ tab
2. Tap on ‘Choose Coin’ and select a token to swap with your ETH
3. Select the Ethereum stake
4. Enter the amount 
5. Remember to leave enough amount for the transaction fees
6. Confirm your purchase
7. Follow the on-screen instructions to finalise your deal

Crypto staking is a safe alternative to crypto trading; however, there are certain risks too. After you unstake your crypto assets, you will not get them back immediately. Most platforms have an unstacking period of 7 days or more. Cryptocurrency value is highly volatile. If there is a large drop in the prices of your staked assets, it may outweigh the interests you gain in the form of newly minted coins. 

Like all investments, you must assess the current market trend before investing. Remember that rewards change from time to time with the change in the value of your crypto assets. Investing in small amounts is the best way to go.