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What is Crypto Staking?
Crypto staking involves locking up one’s cryptocurrency holdings to earn interest or rewards. Technically, “staking” is how certain blockchain networks verify transactions.
From an investor’s perspective, staking cryptocurrencies is a way to increase crypto assets without buying more. Staking cryptocurrencies for maximum passive income is a legitimate way to earn income from existing crypto assets. Investors participating in staking enjoy higher interest than those offered through regular bank accounts.
If you are interested in staking cryptocurrencies but not familiar with the term, let us get to know you quickly. Before we go there, it is crucial to understand the concept of blockchain technology. Cryptocurrencies are built with blockchain technology. Transactions involving such cryptocurrencies need to be verified before the corresponding data can be stored on the blockchain. This verification process is called staking.
Let’s break it down further.
Because the blockchain network is decentralized, there are no middlemen. This is in stark contrast to the traditional financial system that uses banks as a repository for the public’s funds.
Therefore, decentralization requires publicly accessible records across the entire network to ensure full transparency and validity of all transactions. Transactions are organized into “blocks” and committed for inclusion in this record, which is immutable.
By the way, this is the biggest security feature of the blockchain. Since everything can be accessed and verified through a distributed public ledger (record), it is difficult to cheat or crack.
That being said, once these blocks are accepted, users who own those blocks receive transaction fees as payment in cryptocurrency.
What does staking have to do with all of this? you might ask. Simply put, staking is a safeguard against errors and fraud that can happen along the way.
Every time a user proposes a new block or votes to accept a proposed block, they put some cryptocurrency on the line. This process encourages adherence to the rules. So, in principle, the more cryptocurrency a user stakes, the higher the chances of getting rewarded with transaction fees.
However, if a user’s proposed block is found to contain fraudulent or inaccurate data, they could lose what they offered as a bet. This process is called “cutting.”
How does crypto staking work?
There are many ways to start staking cryptocurrencies. For starters, you can choose to verify transactions using your own computer. You can also “distribute” your cryptocurrency to people you trust and ask them to verify your identity.
Note that not all cryptocurrencies are available for staking. We’ll talk more about this later, so keep reading.
What is Proof of Stake?
Proof of stake is a consensus mechanism This allows the blockchain to verify transactions. In Proof of Stake (PoS), the number of coins (or amount of stake) determines the chance of validating a new block.
PoS was created as an alternative consensus mechanism to the original Proof of Work (PoW). PoS is one of the most common consensus mechanisms and continues to gain attention for its efficiency and the possibility of earning crypto staking rewards.
Unlike PoW, which is very energy-intensive and requires a lot of computing power, PoS does not require much computational work to verify transactions. Token owners “stake” their tokens as collateral to validate blocks.
What is a staking reward?
Staking rewards are incentives provided to blockchain participants. In every blockchain, a certain amount of cryptographic rewards are allocated for validating transactions. Therefore, participants who stake cryptocurrencies receive staking rewards when they are selected to validate transactions.
Basically, staking allows participants to earn more cryptocurrency. Rates vary by network, but participants can earn up to 20% to 30% annually. Many people use cryptocurrencies to earn passive income or invest.
How to Stake Cryptocurrencies
To stake a cryptocurrency, one must choose a cryptocurrency that uses a proof-of-stake model, such as Ethereum. There are various ways to stake cryptocurrencies:
by exchange
You can choose to use an exchange to stake your tokens on your behalf. Exchanges are online services that specialize in crypto transactions. Most exchanges require commissions in exchange for staking services. Some popular exchanges that offer staking are Binance.US, Coinbase, and eToro.
By joining the staking pool
Some investors do not use exchanges simply because not all of these platforms support a wide range of tokens. Therefore, another option is to join a so-called “staking pool”, usually operated by another user.
You must connect your tokens with the validator pool through your crypto wallet. To ensure the legitimacy of these validators, be sure to check out the official Proof of Stake blockchain website to see how they should work.
By becoming a validator
Validators are token owners who hold tokens. They are randomly chosen to validate a block. It is equivalent to “mining” when a competition-based mechanism such as proof-of-work is used.
Naturally, one of the most effective ways to stake crypto is to become a validator yourself. A block is verified by multiple validators, and when a certain number of validators verify that the block is accurate, it is finalized and closed.
However, this is a bit more complicated than using an exchange or joining a mining pool, as it requires you to build your own staking infrastructure. You need to have the proper equipment with enough computing power and software and download the entire transaction history of the blockchain.
Becoming a validator also usually involves high entry costs. On the Ethereum network, one needs to have at least 32 ether (Ethereum), which roughly translates to $140,000, give or take.Read more about Stake here and become a validator on the Ethereum network.
Is staking cryptocurrencies profitable?
So, the real burning question is: How do you make money by staking cryptocurrencies?
Let’s put it this way. If you are already familiar with mining and trading cryptocurrencies, this is a great place to start. Staking is just as lucrative after subtracting the risks from mining and trading.
So yes, staking cryptocurrencies is profitable. Basically, you have to buy and hold some coins and add them to the pool. The profit you make (usually in the form of transaction fees) will depend on how much you put in and for how long.
Things to Consider When Increasing Your Staking Profits
Generally, as you continue to bet more, you can make more profit by betting. However, there are other things to consider when increasing your profits:
- coin value: Avoid staking tokens with very high inflation rates. You may get good returns initially, but you may have little profit due to the volatile value of the coin.
- fixed supply: Make sure the token or coin has a fixed supply. The limited circulation of coins within the market ensures healthy demand and continued price appreciation.
- practical application: Cryptocurrency demand largely depends on the practical application of the coin. If it is widely used in various real-world applications, such as digital payments, it will continue to have healthy demand and prices.
Which cryptocurrency is best for staking?
As mentioned earlier, not all cryptocurrencies can be staked. Bitcoin (bitcoin), for example, does not support staking because it uses a different method of verifying transactions: proof-of-work. Generally speaking, if a cryptocurrency is associated with a blockchain that uses proof-of-stake as its incentive mechanism, it may be eligible for staking.
Ethereum
Ethereum Offers decent staking returns as it remains one of the most popular altcoins in the market today. The average return on staking Ethereum is 5-17% per year.
Cardano
Like Ethereum, Cardano It is also a smart contract platform. Cardano (have) is the digital currency that powers the platform’s proof-of-stake network. Binance supports staking of ADA and offers up to 24% yield.
EOS
EOS Also used to support decentralized programs, just like Ethereum. EOS (EOS) can be staked to receive an average 3.2% reward.
universe
Known as the “Internet of Blockchains”, universe Allows different blockchains to transact with each other through interoperability. Various platforms support staking of Cosmos (atom) including Coinbase, Kraken and Binance. ATOM staking generates an average of 7% per year.
Tezos
Tezos is an open source network for Tezos (XTZ) as its national currency. XTZ can be staked on various platforms including Kraken, Binance, and Coinbase. Currently, the average yield for staking XTZ is 6%.
polka dot
polka dotAs with Cosmos, interoperability between various blockchains is encouraged. Although relatively new, Staking Polkadot (point) is supported by multiple platforms including Kraken, Fearless and Binance. The current average yield on staking Polkadot is 12% per year.
Will you lose money by betting on crypto?
When investing, the first and most important thing to consider is the risk involved. So, is staking cryptocurrency safe?
You bet, but there’s definitely some risk involved.
Generally speaking, you don’t “lose” by staking the cryptocurrency itself. What you have to watch out for are things like inflation and illiquidity, just to name a few. Given the volatility of cryptocurrencies, your collateralized tokens may fall. For example, if you stake your cryptocurrency, even if you earn money after staking it, it loses value, so technically you could still lose money.
And if you’re a day trader, you can’t use your coin for weeks or months and miss out on profitable betting opportunities. This is why you should be wise when choosing which coins to bet on.
Check out the tips we’ve outlined in the “Is Staking Crypto Profitable?” section. to ensure you make the right choice before staking.
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