What is Crypto Staking?
Staking is a process in which you stake a portion of your crypto holdings and earn a percentage reward in return. In this process, you validate your crypto asset to a blockchain and receive a consensus (confirmation).Staking is beneficial as some cryptocurrency platforms allow earning higher interest rates resulting in a passive income for the participant. This is almost the same as depositing your money in a savings account and then earning interest on it while the bank uses that money for lending etc.
Cryptocurrencies that support staking:
Staking is only available for cryptocurrencies that use a proof of stake model. e.g Ethereum, Cardano, Polkadot, Solana.
Proof of work vs Proof of stake:
There are two different algorithms for ensuring the security of blockchain and eliminating the possibility of fraud. But both of these algorithms work differently in qualifying and selecting the users for adding the transactions to the blockchain.
In order to make the transactions visible, they are required to be validated by a computer or a network. That is why crypto is decentralised. Both the proof-of-work and proof-of-stake model ensures that the transactions are secure and nobody can commit +fraud. This is why they provide a resource to the blockchain. That resource can be money or computing energy.
Proof of work (PoW):
In the Proof of work model, high-power computers are used to solve the problems of miners by the trial-and-error method. This process is known as mining. The miner makes as many guesses as they can quickly to identify the correct number (hash). The miner who first completes the cryptographic equation becomes the winner and gets the honour of adding new blocks to the blockchain. When the blocks get authentication, the miner receives the reward in the shape of crypto. This model provides high security and competition. However, high energy expensive equipment is also needed for the transaction. The proof of work model is the algorithm for a simple blockchain like one of Bitcoin’s. For complex transactions like Ethereum, the Proof-of-stake model is used.
Proof of stake (PoS):
The Proof of stake model involves skating instead of mining but serves the same function. In skating, miners put up stakes of their own coins for validation of the block. This results in an increased level of security, eliminating the possibility of any kind of fraud and stealing coins as they have their own coins staked up. The weighted algorithm is used to choose the validator. The invested participant who has more stake and holds it for longer than others get selected as a validator. After the validation of blocks, the miners can add it to the blockchain and earn crypto along with their own stake. In case of an invalid block, the miner’s stake or coins are at a loss.
How to stake your cryptocurrency:
The process may seem complex, but it only requires considerate knowledge and dedicated equipment to begin crypto skating.
Choose a cryptocurrency that is based on the Proof-of-Stake (PoS) model, like Polkadot, Ethereum etc. The ones on the Proof-of-work model are not applicable for staking. Therefore, acquiring knowledge of the skating requirements, rewards, and process of the crypto you decide to buy is the first step of the process.
Download the crypto wallet from the official website or take your crypto directly to the exchange. A Crypto wallet is one of the safest options to store cryptocurrency. To create a wallet address, you choose and deposit to buy a cryptocurrency. Then you have to withdraw your cryptocurrency by giving your wallet address to your exchange account. Finally, you can transfer cryptocurrency from your exchange account to your crypto wallet.
With a small amount of investment upfront, you can join a staking pool to earn big bucks over time. Staking pools are the server that offers the chance of better staking rewards by combining individual funds or computing power. While it is beneficial to join a staking pool, there are many factors to keep in mind. Make sure you don’t join an over-saturated pool, as your earnings will be split up or limited, although you get more chances of validation in bigger pools.
In the same way, too, smaller pools usually hold a probability of failure. So, it’s better to start with mid-sized pools. Staking pools are not free of cost; they charge a percentage of fees from the amount of reward you earn. So, keep yourself aware of the fees of the staking pool you select beforehand. The rewards are hard to earn when the server is down, so go for the pool whose uptime remains 100%. Staking independently may reward you more than joining a reliable pool, but the rewards are still promising.
Pros of Crypto Staking:
- Crypto staking makes it easier to get rewards. While mining in PoW is a time-consuming procedure and requires a long-term commitment, almost anyone can stake a small amount of crypto on an exchange. So, it’s the safest way to earn rewards on your cryptocurrency.
- Staking only requires a regular computer providing a costly solution, while mining requires expensive specialised equipment. Moreover, for mining, you need to learn to handle the equipment as well, which gets time-consuming. The PoS requires less energy consumption which makes it environmentally friendly.
- PoS promotes a fast transaction process almost in seconds, while low transaction speed is possible when the network grows. Whereas it takes roughly 10-60 minutes to confirm a transaction on POW.
Cons of Crypto Staking:
- In staking, the weighted algorithm is used to choose the validator, so the people with extensive investment upfront hold more control; the entire supply is governed by a few people. In this way, the influence of larger stakeholding validators is real.
- Many times, you have to lock up your coins/stake, so you won’t be able to sell/trade your stake during this time period.
- PoS is new, and its security features are not widely tested and proven. While it takes strong computing power to attack a PoW network, it only takes money to take over a PoS network.
- Crypto prices can drop quickly. Depending on the volatility, investors need to decide the assets they want to stake carefully.