Cryptocurrency staking is a way through which many blockchains verify their transactions by allowing participants to earn crypto in return. This is usually done to support the blockchain network in question and to help in verification of transactions. Staking is done through a staking pool which is similar to an interest-bearing savings account.
Staking participants are rewarded with interest over a period of time because the blockchain in question puts their crypto to work for transactions verification. This is as a result of a ‘consensus mechanism’ called proof of stake (PoS). Blockchains utilize the proof of stake (PoS) mechanism to verify transactions by doing away with third parties like crypto miners and bank processors. The staked cryptocurrency becomes part of the verification and is in turn rewarded.
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HOW DOES CRYPTO STAKING WORK?
For cryptocurrencies that use the proof of stake mechanism, cryptocurrency staking is the process by which transactions are verified in the blockchain.
When participants stake their cryptocurrencies, the protocol chooses validators to verify transactions when there is any and in turn rewards the validators on verification of transaction. Validators are rewarded depending on the amount of crypto staked and the staking duration.
Staking is not available for all cryptocurrencies. It is only available for cryptocurrencies such as solana, polkadot, polygon and others that utilize the proof of stake mechanism for verification of transactions. Initially, cryptocurrencies like bitcoin utilized the proof of work (PoS) mechanism to verify transactions. Proof of work typically involves miners competitively solving mathematical problems in order to verify transactions. This consumed a lot of energy and in turn increased transaction fees. Proof of stake on the other hand doesn’t require much energy which results in reduced transaction fees, increased scalability and makes it more suited to handle many transactions at a time.
HOW TO START STAKING YOUR CRYPTOCURRENCY
As is already known, not all cryptocurrencies can be staked. Only cryptocurrencies based on the proof of stake mechanism can be staked. To start staking cryptocurrencies, you need to identify cryptocurrencies that are built on the proof of stake mechanism. Some such as bitcoin, litecoin, dogecoin and many others can not be staked because they are based on the proof of work mechanism. Some notable examples of cryptocurrencies based on the proof of stake mechanism include; solana, polkadot, polygon and algorand.
To start staking cryptocurrencies and making passive income, the first thing to do would be to carry out a proper research to identify different worthwhile proof of stake cryptocurrencies that you would like to invest in. While doing this, it is important to note that investing in cryptocurrencies is risky and may result in loss of funds if done carelessly.
After identifying the crypto you would like to invest in, the next thing would be to buy it from an exchange. Different exchanges like binance, kucoin, coinbase and many others can be utilized to buy your desired cryptocurrency. For first timers, it is advised to make use of a centralized exchange due to the ease of use and security associated with it.
After purchasing the desired cryptocurrency, you can stake it directly in the exchange it was purchased if they offer a staking program for that particular cryptocurrency. Otherwise, you can move the crypto to a wallet such as metamask from where third party staking platforms can be accessed. Proper research should be made before making use of any third party staking platform.
Different staking platforms offer different staking pools with a minimum amount of tokens needed to stake in each pool. Choose your preferred pool and connect your wallet to stake in that particular pool. After staking, the blockchain puts the staked cryptocurrencies to work and rewards interest according to the amount of coins staked and the staking duration. Assets can be unstaked after a particular duration of time.
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BENEFITS OF CRYPTOCURRENCY STAKING
In addition to earning more crypto passively, staking also has other benefits both to the investor and the blockchain in question. Some of the benefits include;
- Staking provides an easy opportunity to earn interest on your cryptocurrency assets.
- Staking helps make it easier to HODL assets. This is because most times, staked assets cannot be unstaked until after a particular duration of time.
- Staking helps to maintain the security and efficiency of the blockchain.
- It is less expensive and less energy consuming compared to mining used in the proof of work mechanism.
Staking provides very good interest rates which sometimes can get as high as 10% to 20% per annum. Since the major reason for staking is to earn more crypto, it is quite beneficial to deposit a substantial amount of coins in a staking pool over a reasonable duration of time.
RISKS OF CRYPTOCURRENCY STAKING
Some of the risks associated with staking cryptocurrencies are;
- Since cryptocurrency prices are volatile, prices may drop and in turn affect any profits that may have been made from staking rewards.
- Staking may involve a lockup period in most cases and during this period, you crypto assets can neither be traded nor utilized for any transaction.
- When you unstake your crypto, there may be an unstaking period of few days. In some cases, unstaking before the due date attracts some fees from the staking rewards.
Cryptocurrency staking is a way of earning passively by using your crypto assets to support validation of transactions on the blockchain. Staking is only available to cryptocurrencies that utilize the proof of stake mechanism for transaction verification. Some notable examples of cryptocurrencies that utilize the proof of stake model are solana, polygon, polkadot and so many others. In simple words, staking provides an opportunity for long term holders to earn passively using their crypto assets.