December 13, 2021 -

Everything You Need to Know about Staking in Crypto World

Everything You Need to Know about Staking in Crypto World

Buying and exchanging cryptocurrencies is not new to us. We know that some people successfully invest in various cryptocurrencies and get amazing profits when the prices of these cryptocurrencies skyrocket. But there are other ways of getting good passive profit, for example, by staking cryptocurrencies.

Check out the article to learn what staking means, how does it work, and what do you need to start staking. You are going to learn more about the advantages and disadvantages of staking in cryptocurrency, the risks of staking, and other useful details about the staking process. 

What does Staking Mean?

The process of staking doesn’t require a user to buy more cryptocurrency. Instead, a user locks up their funds without being able to get access to money. Yes, a user can’t sell the stake, but there is a reward for such an action. People who are involved in staking can verify transactions within a certain blockchain network. And verification gives a small award.

In simple words, you buy a certain number of digital tokens and set them aside without selling or using them in any other way. The stake becomes an active validating node and is used by the blockchain system to verify various transactions. This algorithm is called Proof of Stake or PoS. 

Compared to Proof of Work or PoW, PoS is more convenient and less power-consuming. PoS simply requires holding coins on a certain crypto blockchain. The more coins a validator owns, the more mining power they get to confirm the financial operation within the blockchain.

Essentially, holding the stakes of crypto coins means that the holder becomes an important part of the network. Becoming a part of the crypto network has its advantages, for example, getting a reward upon adding a block to the blockchain.

The reward is offered in a form of interest depending on the number of coins they own. Some networks offer higher rewards, it also depends on the demand of the network’s cryptocurrency and some other factors. 

Many blockchains in the crypto world use the PoS algorithm, and the number of new crypto blockchains using this method keeps growing. As a result, new staking methods are created. For example, users can join staking pools, staking providers, and use a delegated proof of stake method. 

The delegated proof of stake or DPoS is a new way of staking crypto. The main goal of DPoS is to make blockchains even more secure to use. The idea is to hold the stake but to delegate the role of a validator to a delegate. 

Then these delegates from groups, the rewards from adding blocks they get are shared among all participants after reaching a consensus. The idea of most of these staking methods is to open an opportunity to small stakeholders. 

How does Staking Work?

So, how does staking in crypto work? The first thing to do is to choose a cryptocurrency blockchain platform supporting staking methods (PoS). Then a user needs to buy cryptocurrency of this blockchain. Upon completing the purchase, a user needs to lock their holding. 

The procedure depends on each network. Usually, it takes just a few minutes to start staking. Most wallets supporting this protocol have instructions on how to start staking in crypto.

If you wish to use an easier way, you may even use an exchange platform to lock your holdings. Most crypto exchange platforms have introduced staking pools so everyone can join. 

The idea of a staking pool is quite straightforward. It is based on the principle of PoS. Since holders with bigger volumes of coins get more power to verify financial operations within crypto blockchains, they get bigger rewards.

A staking pool increases their holdings by gathering together. Meaning, they are prioritized by the system and get to verify more financial operations, so the rewards are bigger. Naturally, these rewards are distributed among pool participants. PoS protocol always prioritizes staking nodes holding more crypto coins, they also receive higher compensations.

If you aren’t interested in joining a staking pool, you can opt for fixed staking. It’s a process when you lock your holdings only for a certain period, then you may withdraw savings. During the period when your crypto holdings are locked, you get profit thanks to the interest rate.

You may also choose flexible staking. It’s a process when you don’t lock your crypto earnings since you can withdraw at any given moment. Naturally, fixed staking offers a higher interest rate.

To sum up, a user who locks their holdings becomes a node that gets the power to verify transactions. Each verified transaction processed by this node gets a reward. The more coins a user locks, the better are the chances of being chosen by the system to verify transactions. More transactions approved equals more profit.

Mining vs Staking

Mining and staking are two different methods of verifying financial operations within the crypto blockchain. Mining is based on the Proof of Work protocol. Staking is based on the Proof of Stake protocol. Let’s start with the peculiarities of Proof of Work:

  • Miners within a blockchain need to solve difficult algorithms by using certain equipment like CPU, GPU, ASICs. It requires a lot of power, but upon completing the task, miners get an opportunity to add a block to the crypto blockchain.
  • Only the first miner or a pool of miners solving the algorithm gets a chance to add the block, and thus, receive the reward.
  • To become a miner, a user needs to invest in mining equipment. Such equipment often consumes a lot of power, so the electricity bills of a miner increase. 
  • The more hash power a miner has, the higher is the chance of getting a chance to add the block and receive a reward. Hash power can be increased by joining a pool, but in this case, the reward is distributed among participants of the pool.

Now that you know a bit more about the mining process, here are some key facts about staking:

  • To become a validator, a user buys a certain number of crypto coins and locks them within a blockchain. By doing so, the user supports the blockchain network. 
  • To add or create a block, a participant needs to stake coins rather than participate in mining. 
  • PoS is considered to be a better alternative to PoW as it does not consume so much energy. PoW is considered unsustainable, it leaves a huge carbon footprint and harms the environment.
  • Users with bigger stakes are more likely to get a chance to verify the financial operation within a blockchain. As a result, they get more hash power and better rewards. Holders of smaller holdings rarely get a lot of mining power, which is why PoS is considered to be a more sustainable mechanism. 

Overall, the mining process requires having a lot of hash power to keep getting rewards. All miners can buy mining equipment and get rewards for adding blocks to blockchains. But as a result, the mining process harms the environment. 

Mining also requires investing in equipment. The best type of equipment is ASIC. ASICs have more hash power, but they can be used only for one purpose – mining, unlike CPUs or GPUs. Moreover, mining consumes a lot of electricity. The more miners mine, the more electricity is used to power up their machines.

When it comes to staking, it’s a much more sustainable process. The more coins you own, the higher are your chances to be prioritized to add a block and get the reward. So, holders of these stakes don’t always consume a lot of energy, only when they are asked to validate the transaction. Other network participants act as the support of the crypto blockchain network. 

Advantages and Disadvantages of Staking in Crypto

Like any other process, staking has advantages and disadvantages. Let’s start with listing the benefits of staking in crypto:

  • A lot easier to get profit by simply owning cryptocurrency and locking it up.
  • Staking in crypto does not require investing in cryptocurrency mining equipment.
  • Staking in cryptocurrency helps maintain the security of the blockchain.
  • You participate in verifying blocks within crypto blockchains, but you don’t spend on electricity, and thus, you don’t leave a huge carbon footprint on the environment. 
  • Instead of just having crypto, you can lock it up and benefit from an interest rate.

One of the biggest benefits of locking up your funds is the interest rate. Some blockchains are extremely generous and offer from 10% to 20% annually. 

Another great thing about staking in crypto is that if you have other holdings in this cryptocurrency, you support the blockchain. For example, you may lock SOL on a Solana blockchain, but you may also invest again in this cryptocurrency. Thus, you support the blockchain so it won’t collapse. 

But there are also some disadvantages of staking:

  • Prices on cryptocurrency overall are volatile, some cryptocurrencies are even more vulnerable. If you invest in a crypto coin, lock your holdings, and get profit from interest, but the price keeps going down, you might get losses rather than profit. 
  • Staking means locking up holdings. In this case, you won’t be able to withdraw your crypto coins and sell them. Unless you use flexible staking which simply doesn’t guarantee a lot of profit. 
  • Unstaking sometimes requires waiting. In some cases, it might take up to a full week to get your crypto holdings back. 

The biggest risk is if the price of the crypto goes down. You will be forced to see your holdings melting while not being able to withdraw and sell the coin. The best way to avoid such an unpleasant situation is to choose a cryptocurrency wisely. Below are some safety tips when staking in crypto. 

Tips on Safe Staking in Crypto

If you are considering staking in crypto, here are a few useful tips:

  • Choose a blockchain that you believe in. If it has some use cases in real life, the price might go up.
  • Don’t fall for high-interest rates, especially if a cryptocurrency is new and isn’t backed by anything.
  • Learn about the minimum staking period before you lock up your coins. It could be several months, a year, or more.

If you aren’t into risks and simply want to get some stable passive profit, consider investing in well-known blockchains that support PoS protocol. For example, Ethereum, Cardano, Solana. 

The interest rate might be less appealing, but you have a better guarantee that the prices won’t go down and you lose your investments. Experts, in general, recommend investing only if you are financially protected.