Introduction to crypto staking
Recently we wrote about cryptomining, one of the primary and most well-known methods of acquiring digital assets and generating passive income in the crypto market.
Then you definitely need to learn about staking crypto. In this comprehensive guide, we’ll tell you everything there’s to know about a more modern and environmentally friendly alternative to mining.
What is staking?
Crypto staking involves locking a certain amount of cryptocurrency in a wallet or on a specialised platform to support blockchain operations. In return, stakers receive rewards in the form of interest or new coins.
Staking operates exclusively within the framework of the Proof-of-Stake (PoS) consensus algorithm, used by many popular cryptocurrencies like Ethereum (ETH), Solana (SOL), Cardano (ADA), and Polkadot (DOT). You can find the Ethereum coin definition in our article.
In this system, validators—users who lock their digital assets—play a key role. They perform a number of functions, including:
- Verifying all new transactions in the cryptocurrency network.
- Adding new blocks to the blockchain.
- In return, they receive rewards.
Let's try to understand what stake is in the form of a scheme:
1. Users connect to the cryptocurrency network. According to the established rules in this network, they lock the required amount of coins in the required location.
2. The network analyses the volumes of assets in users' accounts. Those with more assets are more likely to have the right to record transaction information in the blockchain—they obtain validator rights and can claim additional rewards.
3. Computational power of the user's equipment is used for analysis. Therefore, staking is possible only when the computer or other devices are turned on. However, the process is fully automated and does not require any involvement from the owner of the coins.
4. In exchange for the provided funds or computational power, the user receives rewards in the form of interest payments or cryptocurrency of the chosen project.
In short, to stake crypto, users need minimal investment and effort. However, staking is not only a great way to receive passive income but it also supports the network of the chosen cryptocurrency.
How staking supports blockchain technology
The role of staking in blockchain technology is difficult to overestimate. But first, let's understand what blockchain actually means.
Blockchain is a vast database that is distributed among hundreds of thousands of computers worldwide. It stores records of every transaction ever made in the cryptocurrency network. All users have equal access to this database—the information is completely open and public and not controlled by any central authority. Thus, blockchain ensures two main characteristics: decentralisation and transparency.
The blockchain is powered by smart contracts—special algorithms or programmes that monitor the automatic execution of specified conditions. Their use ensures decentralisation as it eliminates the influence of third parties on decision-making.
When stakers join the cryptocurrency network, they help improve the blockchain in several crucial ways. Let's take a closer look at each of these points:
1. Security. Protecting against security risks is the primary task of every blockchain network. When stakers lock their cryptocurrency in a particular blockchain, they become more attentive to the project's news and transactions occurring in the network. After all, their own money is now at stake. Increased vigilance from many different users always benefits the project and makes life harder for fraudsters.
2. Decentralisation. Staking is a much more accessible way to organise passive income compared to mining, as it does not require special equipment. This allows a greater number of people to participate in network operation, making it more decentralised and resistant to censorship.
3. Scalability. As mentioned earlier, staking uses the PoS consensus algorithm. It is more energy-efficient and scalable than the Proof-of-Work (PoW) algorithm used in mining. This means the network can process more transactions with lower costs, making it more attractive for users.
4. Environmental friendliness. Staking consumes less power than mining. So, it helps make blockchain technology and cryptocurrencies more eco-friendly, which is particularly relevant as more people worldwide are concerned about the future of our planet's health.
5. Innovation support. Staking can enhance and develop the cryptocurrency network by stimulating the development of new features and applications in the blockchain. Validators are naturally interested in the blockchain’s development and long-term success. Otherwise, they may incur losses. This motivates users to take an interest in improving the project and helping to implement new ideas.
Staking brings many obvious benefits to both users and blockchain networks. Its nature helps make blockchain technology more appealing to a wide range of users and thereby promotes the mass adoption of cryptocurrencies.
How to stake crypto
Interested in earning passive income through cryptocurrency? Let’s see how to start staking crypto and what stake apps to use.
The entire process of staking can be summarised as follows:
1. The prospective staker selects a cryptocurrency they're interested in. They get to know the project better and, if everything looks fine, they can proceed.
2. The next step is choosing a platform for staking. There are many such platforms available in the market, each offering its own conditions. We'll talk about them a bit later.
3. Next, stakers need to connect an existing cryptocurrency wallet or create a new one. We'll also discuss this process further in the text.
4. The final step is to stake the cryptocurrency. There you have it, you're all set!
Choosing a staking platform
As we noted earlier, there are numerous platforms available in the market today. Choosing between them is no easy task. Here are the key aspects to consider:
- Platform history. Prospective investors should learn about the platform’s history. Find out how long it has been operating, whether it has had any security issues, and so on.
- Platform reputation and brand. Platforms with a good reputation typically have a good-looking website and an active community. Such projects are often mentioned in the media and receive positive feedback.
To narrow down the search, we've collected several platforms offering cryptocurrency staking.
Binance: the world's largest cryptocurrency exchange offers the opportunity for passive income through staking many popular cryptocurrencies.
The staking functionality was introduced on the trading platform in December 2020. Currently, the platform offers two types of staking—fixed and DeFi.
The potential yield for staking Ethereum on Binance is around 5.20% annually. The trading platform does not charge a commission for locking stakers' assets. If coins are withdrawn before the agreed-upon time, Binance does not pay out staking rewards.
Binance website
Coinbase is another globally popular cryptocurrency exchange. There are no minimum requirements on the platform to stake Ethereum.
The exchange charges a 25% commission on any income earned by stakers. However, the yield for staking ETH on Coinbase is approximately 3.65% annually.
Coinbase website
Bybit is one of the world's most renowned cryptocurrency exchanges, offering a plethora of products, including staking. The platform enables users to earn passive income across a diverse range of assets.
It provides both fixed and flexible staking income options and supports 38 cryptocurrencies for this earning method. Bybit is available in over 100 countries worldwide.
Bybit website
Setting up a wallet for staking
To stake crypto, you'll need a digital wallet. A cryptocurrency wallet can be an application, a browser extension, or a physical device.
Hot wallets like MetaMask are great for those who plan to frequently make transactions. Cold wallets, such as Ledger, are designed for long-term storage of large sums of digital assets.
You can find all the necessary information on how to store crypto in our guide.
Benefits of staking
As we discussed earlier, staking brings quite a few obvious benefits to both users and blockchain networks of digital assets.
Earning passive income
An ability to earn passive income is what attracts many users first and foremost. And the concept of staking sounds so simple—just lock up your cryptocurrency and receive regular rewards for doing so.
In theory, that's exactly how it works. However, in practice, you may encounter unexpected obstacles. We'll discuss them a little later.
Contributing to network security
Staking is beneficial as users contribute not only to their own interests but also support the network of the cryptocurrency they choose to stake.
The logic is simple: the more stakeholders have locked up their assets in the crypto project, the more vested they are in the network's security, and the more closely they monitor all events within the project's ecosystem.
Staking and the PoS algorithm protect blockchains from a specific and common threat known as a 51% attack. To execute such an attack, a malicious actor or group would need to own more than 50% of all the staked cryptocurrency. As a result, carrying out such an attack becomes more costly than the potential gain from it.
Risks involved in staking
No matter how enticing the opportunities presented by staking may be, it's important to remember that no method of earning in the crypto market can guarantee a 100% profit or absolute safety.
Among the most common staking-related security risks are:
1. Market volatility. Cryptocurrency prices can fluctuate rapidly and unexpectedly, both upwards and downwards.
As a result, the cryptocurrency locked up in staking can suddenly lose value. This could lead to users receiving less income than expected or even to losses.
Conversely, if the cryptocurrency's price rises during the staking period, users may miss out on potential profits.
2. Platform vulnerability. Unfortunately, not all staking platforms can guarantee the complete security of users' funds.
Primarily, such risks are associated with fraud and hacking. For instance, hackers may target a platform, potentially draining the accounts of all investors who have placed their money there.
Moreover, technical issues cannot be overlooked. Due to such malfunctions, users may not receive the rewards they deserve. In the worst-case scenario, a staker may lose access to their locked-up cryptocurrency entirely.
Understanding validator risks
However, this list of risks is not exhaustive. Validators who receive greater rewards face even greater dangers:
1. Prime target for attacks. Validators verify all transactions and add new blocks to the blockchain, so they often become targets for hackers. By compromising validators’ accounts, attackers disrupt the network's operations and exploit any vulnerabilities to steal users' funds.
2. No room for error. Since the role of validators in the network is highly critical, mistakes on their part can have severe consequences. If a validator misses a block or misinterprets transaction data, it could disrupt the network's operations or lead to failures.
In such cases, validators may face penalties, potentially losing part of their rewards for making errors.
3. Slashing risks. In certain blockchain networks, such as Ethereum, validators face an additional risk—slashing. It occurs when a validator intentionally violates the rules to gain an unfair advantage.
If detected, the validator could lose not only their rewards but also a significant portion or all of their staked cryptocurrency. This severe penalty helps to offset the losses incurred by other users and the network as a whole.
Mitigating security threats
Avoiding all security risks in cryptocurrency staking may be impossible. But don't fret, because there's a set of rules users should follow to minimise many potential negative outcomes. Let's delve into them:
1. Secure cryptocurrency and platform selection
When choosing an asset, always examine its history, the credibility of its developers, the vibrancy of its community, and its roadmap for future development. A well-established project with a clear direction is less likely to fail.
The same goes for staking platforms. Before getting started, conduct your own research to ensure it has a solid reputation and positive feedback from real users.
2. Portfolio diversification
Even if the chosen cryptocurrency raises no doubts or suspicions, the market remains unpredictable. Volatility and significant changes can crash the asset's price to zero.
That's why experienced investors and traders often emphasise the importance of diversification to mitigate potential losses. In other words, it's better to invest in several different assets or stake them on different platforms.
3. Stay informed
Being up-to-date with current events is always a good idea. This allows users to react promptly to important changes and take steps to capitalise on altered circumstances or at least shield themselves from unnecessary financial losses.
To achieve this, bookmark several reliable news sources that regularly publish fresh information about cryptocurrency, blockchain, and staking. Not missing out on important news can be facilitated by our blog. Additionally, we cover the most significant news daily in our Telegram channel.
4. Common sense
Here, we've included the most basic rules that any trader or investor should always keep in mind, regardless of whether they're staking, mining, or earning through margin trading or algo trading.
- Every market player should thoroughly research available information about cryptocurrency, the platform, or the project before making any financial investments.
- Always remember the rules of risk and money management.
- Trade with money you can afford to lose.
These simple rules can help a crypto staker safeguard themselves against potential financial losses.
Future of staking in cryptocurrency
Over the past few years, staking has gained significant popularity among members of the crypto community. The main reason for this is its relatively simple method of earning passive income. Staking is accessible to anyone interested because it doesn't require substantial investments or specialised equipment.
It can be expected that over time, the community's interest in this earning tool will not only remain steady but grow. Following the introduction of the first spot ETFs in the US market, institutional investors' interest in the crypto market has significantly increased. Analysts have been observing significant investment inflows into cryptocurrency-based products for several months now.
Speaking of trends and predictions, in light of this, it can be anticipated that the interest and investments from large investors will help crypto staking continue to grow, making the cryptocurrency market more eco-friendly and accessible to a larger number of users worldwide.
🤔 Do you believe in the bright future of crypto staking? Share your views in our socials!
💌 Telegram, Twitter, Instagram, Facebook
Here are three other cool articles:
A comprehensive guide to IDO (Initial DEX Offering)
The most influential women in the crypto industry: top 7
This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
