What Is Staking In Crypto and How Does It Work?

• Avinandan Banerjee
• September 08, 2022

Staking crypto is now becoming popular day by day as many people are becoming aware of it. It has emerged as another way for crypto investors to make money. More precisely, to produce a good passive income. 

But, if someone wants to make a profit out of it, they first need to understand the basics to make their investments more effective. To help you with that, we have created this article covering everything about crypto staking. Keep reading.

Introduction To The Staking Crypto

So, what exactly does staking crypto mean? In simple words, staking is the process in which you agree on granting a portion of your crypto to a blockchain network. The blockchain network uses your crypto for the betterment of the network–for example, conforming transactions in an enhanced way. 

High interest in your crypto stake is given to you in return as a reward.

Doesn’t it seem like the baking system? You put your money in the bank in the form of a fixed deposit, and the bank puts it to work for them. In return, you get interested in your deposited amount, right?

In terms of returns, staking crypto is considered much better than depositing money in a bank. But, keep in mind that staking your crypto comes along with some risk. And, if you are someone who can’t bear risks, then options like bank FD will work fine for you.

Remember that the feature of staking is not available in every cryptocurrency. It is available in only those that use the model of proof-of-stake (PoS). It is more efficient in conforming transactions and uses less energy than the proof-of-work model (PoW). Furthermore, we will discuss it in more depth. 

Understand The Mechanism Behind Staking Crypto

Staking is considered to be a new way that aids in confirming the transactions. This process of confirming transactions occurs only in the cryptocurrencies that use the proof-of-stake model. So, any cryptocurrency that uses proof-of-work won’t have the staking feature–for example, the largest cryptocurrency, known as Bitcoin. 

It basically works like this: 

You and many other parties grant some coins to a blockchain network. And, the blockchain network selects one of the parties as a validator to confirm the transactions. Once the validator successfully confirms it, they are rewarded with some new crypto coins. Probably, it will be the same cryptocurrency.

The selection of the validator mainly depends on how much crypto they have staked. The more crypto you stake, you are more likely to be chosen. 

Proof Of Stake Vs. Proof Of Work 

Many cryptocurrencies have adopted or are planning to adopt the proof-of-stake model and neglect proof-of-work. It has produced a debating topic of proof-of-stake Vs. Proof-of-work. 

• The proof-of-work model is known as one of the most popular, secured, and decentralized ways to confirm transactions. Many cryptocurrencies use PoW, including the largest ones–Bitcoin and Ethereum. However, Ethereum is going to make the shift to PoS. 
• Basically, in PoW, there are a number of miners that compete to solve a mathematical problem using high-powered computers. And only one of them gets selected for completing the transaction. The energy used by other miners to compete will be considered completely wasted.

The proof of work model has been criticized a lot because of the vast amount of energy it uses, worsening the effects of global warming. 

For the same reason, China banned crypto mining to lower carbon emissions and help reduce the effects of global warming.

To eliminate these issues, proof of stake takes the entry. 

• In the Proof of stake model, a number of participants agree to lock up an amount of their cryptocurrency to validate transactions–with this act, they are considered stakers. The more coins a participant stakes, the higher his chances of being chosen by protocol. 

The protocol randomly selects the participant and assigns him the task to continue the process of validating the blocks. 

Do you see? In PoS, only one participant gets the responsibility to confirm the transaction. This way, the electricity isn’t wasted, and global warming is harmed. 

So, Which One Is Better? Proof Of Work or Proof Of Stake

Proof of work is considered the most secure model as it makes the attacker’s job extremely difficult. It uses high-security and complete decentralization to confirm the transactions, making many cryptocurrencies adopt this model. 

Keeping these benefits aside, PoW also brings vast disadvantages like high energy usage, increasing carbon emissions. This cannot be tolerated because of the current situation of the world as you already know how global warming is already affecting the earth and such activities as mining gives it more strength. 

In fact, this is the same reason why Elon Musk had to stop accepting Bitcoin as payment in Tesla. 

On the other hand, proof-of-stake comes with many benefits and solves the problems of high energy consumption by PoW. PoS helps make the blockchain network highly scalable and efficient in passing out more transactions through the system. 

But, wait, what if an attacker enters the network, buys a large number of the coins, becomes a validator, and makes their attack successful? 

Yes, it can be done, but the possibilities are significantly less. Because whenever someone tries to buy a very large amount of coins, a sudden surge in its price takes place, which makes it extremely difficult for the attackers to succeed.

Proof of stake seems to be a better option for today’s world. And, many cryptocurrency developers have already understood it–for example, Vitalik, the founder of Ethereum. The founder of DogeCoin is also working with Vitalik, to establish proof of stake in their network,

How Can Staking Crypto Benefit You? 

Staking crypto can be very beneficial. It doesn’t only benefit the blockchain systems but also investors. Here are some of the benefits of staking crypto. 

It’s environment Friendly 

Staking uses a mechanism that causes very little energy, ultimately helping the environment. It doesn’t require high computational power, which makes it much better than crypto mining. 

It Aids The Blockchain Network

Staking crypto helps the blockchain network process transaction more efficiently. Not only this, but it also helps provide high security to the system and make frauds negligible. 

Helps You Earn More Interest

Staking crypto has become one of the best ways for investors to earn a good amount as an interest on their stakes. Generally, it can provide you with good returns, but keep in mind that there are some risks as well, and we will discuss them in the very next section.

Are There Any Other Risks Of Staking Crypto? 

Here are some risks of staking that need to be considered. 

Some Assets May Come With Lockup Periods

There are some stakable assets in crypto that have a lock-up period. Which means, if you lock your asset for a period of time, you can’t unlock it until the period is over. Even if you are at a loss, you cannot do anything. This can leave a huge impact on your overall investment. 

That’s why it’s recommended to stake your crypto in an asset without a lockup period. Here you will have control over staked crypto. 

You May Have To Wait For The Reward 

There are many cryptocurrencies that don’t pay out daily and may take a long time to process the reward of stakers. 

If you are someone who is not comfortable with the long durations in receiving rewards, then you should stake your crypto in a way that pays rewards every day. 

The Validator

Yes, the validator may also create a risk–if he makes any mistake. 

To stake your crypto requires a validator node, and he should be aware of how to process the staking process with 100% accuracy to get good returns. 

Your May be Theft

Yes, there are chances that your wallet may be stolen. But it’s possible only if you are not paying attention to the security of your stakes. 

So, to not let that happen, make sure to use a trustworthy wallet. Do your research and see which wallets fit you.

The Volatility Of The Crypto Market 

The volatility is something that every crypto investor faces. The drop in the market price can be seen in a matter of time which may cause you a huge loss. 

Make sure to do full-proof research before staking crypto. Otherwise, you may see yourself at a huge loss. And we don’t want that! 

How Can You Stake Your Crypto? Investor’s Guide To Staking

Because of the tremendous benefits, many investors are turning towards the staking option. If you are also one of them, here are the steps you need to follow.

Step 1 –

Buy the cryptocurrency that allows you to stake crypto. There are many cryptocurrencies in the market offering the staking service. This may create difficulty for you in the selection process. But, still, it’s good to indulge yourself in research as it helps minimize the risks.

Also, keep in mind that many cryptocurrencies have a minimum staking coin requirement. So, make sure to have funds in your wallet to meet the requirements of the network.

Step 2 –

Pick up a crypto wallet to keep your staked crypto safe. There are many trustworthy wallets that you can use. For example, Binance, Coinbase, Kraken, etc. These are exchanges that help you stake your crypto within a few clicks. 

Step 3 –

After selecting the wallet, you can now transfer the minimum amount of coins to the cryptocurrency you have selected to stake. Most likely, your exchange will have the option to stake your crypto. They will have a separate page for processing the transactions of staking. Otherwise, you can use staking pools. You will have to transfer your crypto to a staking pool and then stake your crypto from there.

That’s it; you are done with the staking process. 

Wallet exchanges have made staking and overall cryptocurrency trading very easy. And, only hard work investors have to do is research for the best cryptocurrency in the market. 

What are some Cryptocurrencies In Which You Can Stake?

Here’s the list of some cryptocurrencies that help you to stake your crypto and earn a good passive income.

• Tezos 
• Solana
• Polkadot
• Cardano
• Terra
• Ethereum 

Ethereum hasn’t adopted the proof of stake model fully as the developers are working on it. But still, they are offering the staking process, which is good news for Ethereum lovers. 

Keep in mind that…

• Staking crypto has benefits, but it involves risks as well. Due to that, it’s highly recommended to do good research on whatever cryptocurrency decides to invest in. 
• There are many cryptocurrencies in the market, but not all of them are worth investing in. That’s why it’s good to attain knowledge and pick up the best ones. 
• There might be some crypto scams as well. Make sure you educate yourself on this subject as well, so that you don’t fall for any false cryptocurrency. Blockchain networks are entirely decentralized, which may reduce cryptocurrency security – making scammers’ work more accessible.

Many experts have supported PoS by saying that it will be much more fruitful in the long term in the comparison of PoW. Many cryptocurrencies are already using PoS, and big cryptos like Ethereum have started adopting it. And these are the same networks where you will be able to stake your crypto. Otherwise, any network with the PoW model won’t serve you with the staking option. 

Final Thoughts 

Staking crypto can be a great way to build an excellent passive income source. The only thing that is required to do is–invest wisely. Staking can be definitely seen as the future of cryptocurrency as it uses the proof of stake model, which is much greener than the proof of work model.  

If possible, try reaching out to a cryptocurrency expert. He/she will be an excellent source to receive a good piece of investment advice. If that’s not possible, you can do it by yourself with the help of the internet. Almost everything is now available at your fingertips. You just have to avail it!