Beginners Guide

What is Cryptocurrency Staking? Explained in Layman’s Terms

Author: Qadir AK

Qadir AK right arrow

Author

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

  • author facebook
  • author twitter
  • linkedin

In order to make money, every investor wants a passive income stream, which can generate a lot of income while relaxing on the beach and sipping a mocktail.

But, it isn’t like those days when our traditional finance was used to offer us a compelling return on our investments. 

So, what’s the solution? How & Where do we invest now?

Well, have you ever thought, that you could earn passive income by keeping your cryptocurrency within your wallet?

Well, that’s possible now, Via “Crypto Staking”.

In Staking, your assets are locked for a certain amount of time and staking rewards are the alternative source of money paid to cryptocurrency owners to help in the regulation and validation of cryptocurrency transactions. 

In essence, Staking rewards are similar to the dividend or interest earned in a savings account, however, they carry a higher risk.

In the end, even the most cautious investors could begin considering digital assets as a viable alternative to traditional financial institutions could provide. Staking can be an excellent starting point for investors.

I’ll go over all the essentials of crypto staking, like how it works, whether is it beneficial, etc. I’ll also explain how, to begin with, staking cryptocurrency.

Let’s begin with an explanation of what staking is.

What is Staking?

Staking is the process of pledging crypto assets to a cryptocurrency protocol to earn rewards in exchange. Users can be part of the process of securing the network by locking coins or tokens as they have a stake in the network.

Staking has become a well-known method for crypto investors to build their portfolios without selling their assets. Staking can be described as the equivalent of placing your money in a saving account. However, when you deposit into your savings account, the institution gives it back to the public and shares the interest with you. 

But when you Stake in crypto and lock it up, you secure your digital assets to take part in the safety of a blockchain-based network and earn rewards for it.

The higher the number of crypto-assets you pledges, the higher the reward you will receive. Rewards are shared over the chain this means that the whole process of obtaining the reward is completely automatic.

All you need to do is INVEST in the network, which means that your crypto-assets will generate money, even when you sleeping!

But, this might raise a question in my mind, like how does this staking work & what’s the process of generating rewards through it? 

Well, let’s dive into it…

But,

Wait to get a better understanding of the working of staking, it is essential to know the Proof of Stake

What is Proof of Stake (PoS)?

If you’re aware of the way how Ethereum operates, then you’re likely to be familiar with the concept of proof of work (PoW). Through this method nodes store transactions in blocks, and then solve to crack complicated mathematical puzzles by enlarging their computing power so that they get an opportunity for the next block to be added to the chain.

Proof of Stake (PoS) is the upgraded version of PoW. 

A proof of stake (PoS) is a kind of consensus mechanism used to confirm cryptocurrency transactions. It’s a most recent consensus technique that has emerged to boost speed and efficiency while reducing fees.

One of the ways Proof of Stake lowers costs is by not mandating miners to work through math-related problems that consume energy. The transactions instead are verified by those who are committed to the blockchain through the process of staking.

There is a possibility that the creation of blocks via staking provides greater scaling for blockchains. This is one of the reasons, why the Ethereum network has moved from PoW to PoS with a series of technological upgrades, called ETH 2.0.

Now, you have a better understanding of Proof of Stake, let’s learn about the working of staking. 

How Does Staking Work?

Crypto staking is the process of storing the cryptocurrency in a wallet to boost the operation of a blockchain.

However, the stakers can lock up their tokens or coins in exchange for collateral, as they get rewards in return for keeping the blockchain secure. 

The coins or tokens that are deposited are utilized to validate the transactions that are occurring on the blockchain, using the consensus mechanism called the Proof of Stake (PoS). In this way, stakeholders receive rewards in the shape of new coins in exchange for their contributions to this network.

Eventually, there are 3 distinct ways you can stake cryptocurrency, well we have showcased those ways of methods down below;

  • The first option is to keep your tokens or coins in a wallet that allows the staking. If, for instance, you hold NEO within the NEON wallet and you’re automatically taking a stake.
  • The other option is to make use of a stake pool by depositing your tokens or coins into a pool, and it will then be staked in your name. The benefit of this is that it lets you gain rewards even when you don’t have plenty of tokens or coins.
  • The third option is to make use of an exchange that can support stakes. For instance, Binance offers a “Staking Rewards” program where you can earn rewards by holding specific tokens or coins that are supported by the exchange.

After a cryptocurrency has been staked, it is part of the process and cannot be traded or used up until it’s taken out of the pool. At present, popular options are Cardano, Polkadot, and Solana among the top three others include Avalanche, Tron, EOS, Algorand, Tezos.

The majority of networks pay the staking reward in the staking currency they use However, some networks use a two-token model where rewards are paid in the form of a second token.

But, have you ever thought, about how these rewards are generated? What are the various ways to generate these rewards?

Well, let’s find that out… 

What is the Process of Generating these Rewards?

Every time a block gets validated new tokens for that currency are created which are distributed to staking reward. For instance, Proof-of-Stake (PoS) assets such as Solana, and Tezos allow you to earn rewards from the staked assets you have.

In essence, there are two kinds of rewards that are distributed, staking rewards and transaction fees. 

In staking of rewards, you are allowed to put your crypto-assets on the line by using an underlying proof of Stake node to confirm the block of transaction. If the node that you delegated successfully signs or attests to blocks you will be rewarded for staking which will increase your crypto-assets net.

The second method is through the Transaction Fee; 

Along with the staking reward, each transaction is accompanied by the cost of a small amount, which makes it simpler for the Node to decide on which transactions to enter into the block. Additionally, the accumulation of fees from the transactions is also passed on directly to the Node.

The majority of the networks pay the staking rewards in the currency that they employ. However, few networks utilize a dual-token system that pays rewards in the way of another token.

It is very essential for an investor to have an ideal knowledge about the way of investing in cryptocurrency. That’s why to save you time & hustle in researching and we’ve described the ways to invest in cryptocurrency.

How do you invest in cryptocurrency staking?

There are many options to begin staking your cryptocurrency, based on the amount of financial, technical, as well as research investment you’re prepared to take on.

Your first choice will be whether you want to validate transactions on your computer or “delegate” your cryptocurrency to an individual who will do the legwork for you.

Networks that permit cryptocurrency staking generally allow those who have tokens to offer the tokens to other users to use in the process of validating transactions, earning part of the benefits.

  • Making use of an Exchange

The most straightforward alternative is to utilize an online platform to place your tokens in the right spot for you. Many popular cryptocurrency exchanges allow you the option of staking with the promise of a commission and also permit the use of fiat currency to buy crypto.

Exchanges that allow the possibility of staking of the crypto evaluated by Nerd Wallet there are three that offer to stake on at the very least some crypto assets: Binance.US, Coinbase, and eToro.

Some offer rewards programs that allow users to earn extra crypto in a manner comparable to the staking process.

  • Joining a Pool

If you don’t want to depend on an exchange to take your staking choices for you or are unable to find an exchange that is compatible with the token you’d like to invest in, you may join what’s commonly referred to as “staking pool” operated by an additional user.

To do this, you’ll need to be aware of how to utilize a crypto wallet to connect your crypto tokens to the pool of the validator.

If you have your account, select the option to deposit cryptocurrency and then choose the type that you’ll be depositing. This will create an account number for your wallet. Log into your exchange account, and select an option for withdrawing your cryptocurrency. Copy and paste the address of your wallet to transfer your cryptocurrency from the exchange account into your wallet.

The official websites for many blockchains that are proof-of-stake provide information on how to locate validators, as well as information on how they function.

  • Being a validator

Setting up your staking system can be a bit complicated. It requires the appropriate computer equipment and software, as well as downloading a copy blockchain’s complete transaction history. Additionally, it can have an expensive cost of entry.

For the Ethereum network, for instance, it is required to begin with a minimum of 32 ETH, which by 15th September 2022 is approximately $48,000. Participating in the pool or using an online platform does not require such prerequisites.

What cryptocurrencies you can stake?

The crypto staking method lets you earn money from your digital assets without needing to withdraw funds. In simple phrases, you can use your cryptocurrencies that are idle to work and earn an income stream that is passive and still retains the ownership of the coins.

A lot of cryptocurrencies utilize the PoS mechanism and the list of cryptocurrencies that use the PoS mechanism grows each year.

We’ve highlighted some of the most popular cryptocurrencies which you can stake below.

  • Ethereum – Top Staking Coin for Long-Term Investors

The Ethereum ecosystem continues to expand in leaps and bounds it is attracting developers as well as investors. But, the second largest cryptocurrency was initially based on a consensus based on proof-of-work. 

To confirm transactions, computers needed to complete complex tasks that required a lot of energy as well as time.

  • Polygon – Top Staking Coin for High APY

Polygon is a cryptocurrency developed to provide capacity to Ethereum. It is a blockchain that allows compatibility with Ethereum-based apps and facilitates interconnection. Polygon is one of the most reliable staking coins that can be favored by validators.

It is only required to purchase just one MATIC token to participate in the Polygon network. You need at least two tokens for the first time to start taking part in the. If you do not wish to become a validator for yourself, you could make use of platforms like Crypto.com to earn attractive returns on Polygon.

  • Cardano – Best Sustainable Staking Coin

Cardano is among the most popular proof-of-stake (PoS) cryptocurrencies of the present and is focused on sustainability and scalability.

The network is trying to resolve the issues of energy consumption by mining Bitcoin and thus, identifying itself as green crypto contrasted with other digital currencies. Additionally, since the network has launched the smart contract service, which will benefit Cardano to be well-positioned to see more growth soon.

  • Uniswap – Top Decentralized Staking Coin

If you’re considering the most reliable Defi coins to stake the risk, then Uniswap is an option to look into. Uniswap accounts for around 25% of all trades for the Ethereum network.

In terms of stakes, Uniswap is highly preferred by crypto investors who are wishes to earn passively. Uniswap can be considered to be one of the cryptocurrencies with the lowest value in 2023. If you invest in Uniswap it is possible to gain ot the price of UNI coins and be able to be involved in the decisions regarding the way the network is run.

  • Solana – Best Staking Coin for Long-Term Growth

Solana is another Defi token that was created with the possibility of scaling. Its blockchain allows for rapid transactions and has fee-free transactions, which has improved its market performance in 2021. The cost of Solana was able to go from $18 to $100 in just one year.

While its value Solana has decreased from its beginning in 2023, the cryptocurrency is still gaining momentum for developers. If you decide to invest in this investment, you can expect annual returns that range from between 7% and 11%, depending on what platform you select.        

Benefits and Risks involved in Staking?

The Pros of Staking Crypto

Some of the benefits of staking crypto include:

  • Earn Passive Income

One of the major benefits of crypto staking is the ability to earn a passive income. Simply by holding on to your tokens/coins in a secure place and you will begin earning money.

  • Support the Network

If you make a bet on crypto, you’re in essence contributing to the support of the network. In doing this you’re helping to ensure the stability and security that the blockchain.

  • No Technical Knowledge and Hardware Required

Another benefit of Staking is that it does not require any technical expertise or knowledge. Contrary to mining, which usually requires special hardware as well as software. The only thing you have to do is keep your money in a secure wallet to place a bet on crypto.

  • Potentially Higher Returns

Staking could yield more lucrative yields. But, it depends on the cryptocurrency you’re taking on. Additionally, the income earned from staking is far more secure than mining.

  • Greater Security

Since your cash is secured as collateral and is not subject to theft, they are less likely to be taken or compromised.

The Cons of Staking Crypto

Cos of staking crypto can be:

  • Liquidity loss

One of the main negatives of using crypto to stake is that it will hold your assets over an extended period of time. For instance, if you put your money into one year, you’ll not have access to them for that period of period.

  • Market Risk

A further disadvantage of staking cryptocurrency is that there’s always the possibility of a possible negative price fluctuation. If you’re investing the token for a whole year at a rate of 20% APY, and its price falls 40%, you’ll be losing money.

  • Slashing

Slashing is a different risk that comes with the risk of staking crypto. This occurs when a validator is found to be violating the regulations of their network. If this happens they will be “slashed” or have a part of their stake removed.

  • Minimum Stake Required

The majority of networks have a minimum amount you must be able to invest to take part. This could be a problem for some who do not have enough tokens/coins to satisfy the minimal requirement.

  • Platform Risk

Another thing to think about is the platform risk. There is a chance your platform for staking your crypto may fail or be compromised.

Conclusion

Cryptocurrency comes with numerous advantages, like the opportunity to earn money passively and contribute to networks. The most significant advantage of staking is the fact that you earn more crypto. Additionally, the rate of interest can turn out to be generous. In certain instances, you can earn more than 10% to 20% annually. 

Staking is also a means to help the blockchain of the cryptocurrency you’ve invested in. Cryptocurrency holders rely on using staking to confirm transactions and ensure that everything runs smoothly.

But, there are certain risks to be aware of including platform risk and risk to the market. If you are considering staking your cryptocurrency, make sure to conduct your study and be aware of the potential risks.

FAQs

  • Which cryptocurrency is the best to stake?

One of the biggest cryptocurrencies, Ethereum (ETH), is currently transitioning from a Proof-of-Work (PoS) to become a Proof-of-Stake (PoS) consensus. This means that it could be one of the most popular cryptocurrencies to be staked in 2023.

  • What is the advantage of taking a stake in Ethereum?

With these platforms, anyone with a minimum balance required for a particular cryptocurrency can be able to validate transactions and earn staking rewards.

  • Can staking earn you money?

Staking is one method for crypto users to earn passive revenue. Staking can yield rewards that are higher than what you can make from savings accounts.

  •   Are you able to take your money out of the stake?

When you have completed your time period of staking, you can safely take your money and make use of them in any way else you like.

  • Are crypto-staking transactions taxable?

Yes, Staking Rewards Are Taxable.

  • What do you lose when you stake?

Some proof of stake platforms employs “slashing” to punish validators who make a mistake and destroy a portion of the stakes they set in the system.

  • What are the negatives to taking crypto on the staking?

One of the main drawbacks to staking cryptocurrency is the fact that, if put your money into an entire year, you’ll not have access to the funds throughout the period.

Well Done! You have now completed the Lesson.

Complete the Quiz and Get Certified! All The Best!

Was this writing helpful?

No Yes

Back to top button