Staking is a common term that you will come across very often while dabbling in the crypto market. Staking is the method by which many cryptocurrencies validate transactions, and help traders earn rewards by putting their crypto to work.
But what does it mean by crypto staking?
Crypto staking is where you use your crypto assets to back the blockchain network and verify their transactions. Many traders consider crypto staking as the finest method to make a passive income, mainly because many cryptocurrencies provide a decent interest rate for staking. If you are new to crypto staking, it is essential to know more about it, so let’s get started.
How does staking work?
At first, the participants offer their crypto assets to the cryptocurrency protocol. Later, a validator will be opted from the contributors to validate transaction blocks. The more coins you contribute, the higher your chance of being chosen as a validator.
There are two types of staking – locked up and flexible staking. If you wish to invest your assets for higher returns for an agreed time, go for locked-up staking. And if you are interested in short-term or daily rewards and need to withdraw the pledged coins whenever you want, go for flexible staking.
Whenever a new block is added to the blockchain, new crypto coins are minted and distributed to the block’s validator. Most of the time, the rewards are the same type of cryptocurrency, while others reward different cryptocurrencies.
If you wish to stake crypto, the first thing you need to own is cryptocurrencies that use proof of stake. After that, decide the amount you want to stake and proceed through popular cryptocurrency exchanges.
Benefits of crypto staking
The significant advantage of staking is that you can earn more crypto with great interest rates without putting in much effort. Many a time, you can even earn up to 10%-20% in a single year. Therefore, staking is a highly profitable investment option, and to get started, the only thing you need is cryptos that use a proof of stake census mechanism. Here are other benefits of crypto staking.
- The hassle-free method to gain interest on your cryptocurrency assets
- Generally, any activity you do with crypto, for instance, crypto mining, requires different tools, which are not needed for crypto staking.
- It is more eco-friendly when compared to crypto mining.
- By staking, you are indirectly helping to maintain blockchain efficiency and security.
Risk factors associated with crypto staking
There is nothing in the crypto market that comes with zero risk. The below listed are a few risks of crypto staking one should keep an eye on.
- The crypto prices are volatile, and the price drop could happen before you know it. Therefore, if the assets you staked face an extreme price drop, the interest you earn from them will be overshadowed by it.
- Once you decide to stake, you will need to lock up your coins for a particular time. And the major disadvantage is that during this resting period, you will be restricted from doing anything with that locked asset, for example, selling the assets.
- And if you choose to un-stake your crypto, there are specific procedures and the un staking period is generally seven days which sometimes will go beyond that.
Is staking possible for every cryptocurrency?
The most commonly asked question is whether staking is available on every crypto when it comes to crypto staking. The answer is NO.; cryptocurrencies that don’t have a proof-of-census mechanism cannot be staked. There are other census mechanisms adopted by cryptocurrencies other than proof of stake, for example, Proof of work; and it was the first-ever census mechanism and came to light with Bitcoin. Proof of stake was introduced in the year 2012.
People argue over which census mechanism offers the most safety. This is because proof of work utilizes substantial energy, which makes proof of work hard to break or attack. Because of this reason, many cryptocurrencies use this census mechanism.
If you are a crypto holder and have sufficient crypto assets with you and are not planning to invest them or trade them in the future, then staking is the right choice. This doesn’t demand any effort from your side; at the same time, you will be receiving more crypto.