Crypto staking has become more of a buzzword recently in the industry, however, it isn’t exactly a new term when it comes to cryptocurrencies. The recent hype surrounding staking, proof of stake coins, and the negativity surrounding Bitcoin for its proof-of-work system has caused a seismic shift in the industry, which has prompted the likes of Ethereum to vastly outperform the top cryptocurrency.
Within this guide, we’ll explain all there is to know about crypto staking, generating rewards, and more, as well as exploring what impact staking might be having on the price of related coins by taking said coins out of the circulating supply – albeit temporarily.
Introduction To Crypto Staking: What It Is, Why It Matters, And More
Crypto staking has become increasingly popular as decentralized finance, better known as DeFi, has grown as a sub-sector of the crypto market. The booming trend has attracted a large portion of token holders to stake crypto for various reasons. Staking can offer financial rewards, but also contribute to blockchain protocols to do things like bolster security.
The goal of this guide is to focus on the cryptocurrencies that allow staking, explain the process of staking, highlight any potential requirements and the risk of staking, and finally, we’ll look at some staking pools, staking providers, and some upcoming staking opportunities to pay attention to.
What Is Staking In Crypto?
Staking cryptocurrency typically involves locking up a portion of coins, tokens, or other digital assets in a smart contract. The coins are set aside for an important role of becoming a validator node. A validator is a critical piece of a Proof-of-Stake network that works to actively secure a network and validate transactions.
In exchange for keeping coins locked up in this manner, the validators are compensated with passive staking income. Staking income is paid out as variable interest to token holders, based on a variety of factors such as supply and demand. When the trend is hot, rates might be higher and vice versa as more market participants actively stake tokens.
As the emerging technology sector flourishes and new innovation appears, there have become several new ways to stake crypto, which include group staking, cold staking, and more. Some cryptocurrency exchanges have begun to roll out ways of staking coins on their platforms.
What Is Proof Of Stake?
Proof-of-Stake is a process where a person or entity can validate blockchain transactions depending on the total number of staked coins. The more staked tokens the individual or entity has, the more mining power they have and the more likely they are to generate block rewards.
Proof-of-Stake was created as an alternative to the Proof-of-Work mining based networks that debuted with Bitcoin and other early cryptocurrencies that are still popular today. Recently, Proof-of-Work coins have come under fire due to their related energy requirements. Proof-of-Stake is more energy efficient.
Mining Vs Staking: What Is The DIfference? Comparing PoW And PoS Protocols
A side by side comparison table below makes the differences between the two very different types of consensus algorithms easier to see and understand.
| Proof-Of-Work (Mining) | Proof-Of-Stake (Staking) | |
| What It Is | Specialized computers called miners solve complex mathematical equations | Tokens are locked up with the goal of supporting and securing a network. |
| How It Works | The miner that correctly solves the equation adds the block to the blockchain and receives the reward. | Blocks are added to the blockchain by staked coins acting as validator nodes. |
| Rewards | Miners with the most computing power produce the most hash rate and therefore are most likely to receive a reward. | Validators with the most coins staked are more likely to receive a reward. |
| Requirements | Requires specialized computers which consume a lot of energy and increases costs. | Anyone can participate in staking without equipment and is more energy efficient. |
How Does Staking Work?
Crypto staking works simply by locking up tokens to be used for validating transactions on the blockchain. It begins by an individual or entity purchasing a certain number of coins to stake in the network. Staking tokens are only supported in a PoS protocol, and each protocol could have unique requirements set by the developer or creator of the project.
Staking crypto is typically easy and done with only a few clicks right from within a crypto wallet. Some types of cryptocurrency networks require a set amount of tokens staked in order to participate. Unlocking tokens from staking is usually just as easy.
The higher the amount of coins, the more transactions are assigned to that node to validate, which increases overall passive income for those with the most coins. This creates more incentive for users to participate in the network in a larger way.
Benefits Of Staking Crypto
Staking became popular in the cryptocurrency industry for a reason, and that reason is due to it making money for token holders through generating passive income. There are certainly a subset of users who are doing so simply to participate in the network consensus, but the vast majority are staking tokens in order to generate passive income. Still, there are plenty of other reasons to consider.
Generation Of Passive Income
Because we’ve already touched on passive income, we’ll start the list of benefits here. Passive income is the primary reason for considering staking crypto assets. It is the incentive users are given for locking up their tokens.
Passive income can be fixed or variable depending on the protocol and the parameters set forth by the project developers.
Low Entry Fees
The related to staking are negligible especially when compared to traditional financial products that provide any type of variable or fixed annual percentage yield.
Permissionless
When accessing any type of service that generates passive income such as banking products, the end users must pass whatever requirements that are created by the bank offering the product. With decentralized cryptocurrencies, simply having the coins is all you need to access these services.
More Energy Efficient Than Mining
Mining for cryptocurrencies has recently received a bad reputation due to widespread energy concerns. As the Bitcoin network ballooned in 2021, mining came into the crosshairs of Tesla CEO Elon Musk. Musk raised concerns over the energy impact of Bitcoin mining, and caused a huge exodus from Bitcoin miners in China. Eventually China banned Bitcoin mining altogether and it has forced the industry to move toward greener alternatives.
Staking coins allows for a secure crypto network, but without the same impact on the environment or energy requirements.
Top Risks Of Staking Crypto
Staking crypto almost seems too good to be true, and it is one of the rare cases that isn’t so. Although the returns and passive income possible are legitimate, they do not come without any concern for safety or risk.
Here are the biggest risks related to staking crypto.
Market Risk
As with all cryptocurrencies, there’s risk related to the market itself. By holding coins that are being used for staking and with the goal of producing passive income, the total profit or loss generated is always at risk due to being exposed to normal market conditions.
For example, if someone is staking 32 ETH – the amount required for ETH 2.0 – then they have a substantial amount of capital on the line. If the price of Ethereum falls by 50%, so does the value of this capital regardless of how much passive income is being generated.
Liquidity Risk
This is less common within protocol-based staking platforms, but is a real risk related to platforms that allow a different style of crypto staking called liquidity provisioning. By staking tokens within an automated market making protocol, users are pooling tokens together into a staking pool. If a larger player attempts to pull all their liquidity out at once, it could tank prices and leave very little liquidity left for other investors to access.
In some rare cases, a project developer themselves have pulled all the liquidity out of a pool, committing a “rug pull” on participants.
The Most Popular Types Of Staking Coins On The Market Today
By far and large, Ethereum is the most popular staking coin on the market today. However, there are hundreds of coins now that offer staking in some capacity.
Other popular staking tokens are Algorand (ALGO), Tezos (XTZ).
Is Crypto Staking Worth It?
Staking crypto is worth it for those that don’t mind their coins being locked up. In exchange they receive rewards back in crypto and are participating within the network.
Can I Lose Crypto By Staking?
It is rare to lose crypto by staking, unless there is a hack or some type of bug in the code. However, you can lose money by staking crypto if the crypto itself loses value.
Is Staking Crypto Safe?
Staking crypto isn’t entirely safe, but it is a generally safe practice for those that do their own research and are careful.
What Is “Not Staking” In Crypto?
Some tokens require a certain amount of time to mature before they can be staked. This prevents new participants from suddenly taking up too much control over a blockchain and rewards loyal users.
