What is Staking Crypto and How does It Work?
Staking crypto means pledging your cryptocurrencies to the blockchain network to confirm transactions. However, this facility is only available for cryptocurrencies that work on the proof-of-stake consensus. That said, staking could be a lucrative way of generating passive income. This is especially true for some cryptocurrencies that offer a higher rate of interest for staking. To know more about how you can benefit from staking, go through the following sections.
What are Staking Crypto Investments?
When you stake your crypto investments, you help the blockchain in maintaining its operations and security. In return, you get to earn money, like in the case of a high-interest savings account.
By staking crypto, you can earn substantial rewards from your crypto holdings. This reward will be particularly massive if you already have a substantial portion of your portfolio invested in these assets.
Cryptocurrencies typically work through two primary consensus mechanisms – proof-of-work and proof-of-stake. These models help ensure legitimate transactions. Upon approval of a transaction, a new block gets added to the blockchain. In this way, this consensus secures the blockchain network.
How Do Staking Crypto Work?
Staking is the process through which new transactions are included in a blockchain. This is a process that works for some cryptocurrencies that use the proof-of-stake model.
To begin with, users contribute their coins towards a crypto pool. The protocol then chooses validators for confirming transactions. Note that the more coins you pledge, the higher your chances will be of becoming a validator.
Every single time a block features an addition to a blockchain, new cryptos are minted. They are distributed as staking rewards to a particular block’s validator. Mostly, these rewards are in the form of the same cryptocurrency as the one you are staking. However, some blockchains may offer different crypto types as a reward.
Also Read: What Is Helium (HNT) Crypto? How To Mine And Buy Helium Tokens?
How To Stake Crypto?
The concept of staking crypto might seem overwhelming at first. However, with proper knowledge, the process becomes simple. You can follow these steps to stake crypto:
- Buy a proof-of-stake cryptocurrency
As mentioned above, only proof-of-stake cryptocurrencies offer the facility of staking. Thus, you should consider buying a currency that works on this consensus mechanism. Here is a list of staking coins:
• Solana
• Polkadot
• Ethereum
• Cardano
You can begin searching for the best crypto for staking by conducting thorough market research. Upon finding the ideal crypto, you can buy it through a crypto exchange. - Transfer your asset to a blockchain wallet
When you buy cryptocurrencies from a particular exchange, they will be available for trading on it. Note that some exchanges feature their own staking programme for certain cryptos. If such is the case, you can stake cryptos directly.
Otherwise, you will have to transfer your asset into a crypto wallet. After that, you need to go to your wallet, choose the crypto deposit option and select the cryptocurrency you want to stake. This will generate a wallet address for you. To transfer your assets from the exchange account to your wallet, you must copy-paste that wallet’s address. - Be a part of a staking pool
While staking crypto is possible through exchanges, many individuals prefer joining a staking pool instead. These platforms allow crypto traders to combine their funds, which helps them earn better rewards.
What Is Proof of Stake?
Proof-of-stake or PoS is a fairly new consensus mechanism which increases the efficiency and speed of a blockchain while reducing power consumption. One of the primary ways through which this model reduces cost is by eliminating the need to solve complex math problems.
Decentralisation is the primary principle behind a blockchain and cryptos. When it comes to these digital assets, no regulatory body controls their transactions. The network completely relies on various participants to validate transactions. These are then added as new blocks to the blockchain.
That said, PoS is a consensus mechanism that uses cryptocurrency holders instead of miners to validate transactions. In this method, users or validators lock a certain amount of crypto in the blockchain’s smart contract. In exchange for validating new transactions, they get the opportunity to earn substantial rewards.
What Are the Benefits of Staking Crypto?
Evidently, crypto staking offers a lucrative passive income option for crypto traders. The following are some of the benefits of staking cryptocurrencies:
- You can easily earn interest from your crypto holdings.
- Unlike crypto mining, crypto staking requires no heavy equipment.
- You contribute towards maintaining the security and safety of a blockchain.
- It is also more environmentally friendly as opposed to crypto mining.
Moreover, one of the primary benefits of staking cryptos is that you earn more cryptos at a generous interest rate.
What Are the Risks of Staking Crypto?
Besides the advantages, staking in crypto also brings in certain risks. Find them below:
- Crypto prices tend to be extremely volatile. Subsequently, if the assets you have submitted suffer a huge price drop, any interest you earn on them would also drop.
- With staking, you have to lock up your assets for a certain time frame. During this period, you cannot trade or transfer your crypto investments.
- If you wish to unstake your assets, you have to wait till the end of an unstaking period of 7 days or more.
The biggest risk associated with crypto staking is a sudden price drop. Thus, consider conducting thorough research about a coin beforehand.
Why Don’t All Cryptocurrencies Allow Staking?
Most well-known cryptos, such as Bitcoin, do not offer the option of staking. To understand why, let us dive deeper into the background of cryptos:
- Typically, cryptocurrencies are decentralised. This means that no authority governs the transactions on the blockchain. Instead, blockchains use a consensus mechanism for validations.
- That said, many cryptos, such as Bitcoin and Ethereum 1.0, use a consensus mechanism called Proof of Work. This process involves miners across the world competing to solve complex mathematic puzzles. The winners become eligible to add a block to the blockchain. In return, they receive equivalent cryptos.
PoW is a scalable model for crypto like Bitcoin because the coin’s functions are relatively simpler. However, for a more complex coin like Ethereum, which has a large network of DeFi, Proof of Work can cause certain constraints.
Moreover, as mentioned previously, staking cryptos is only possible with coins that follow the PoS mechanism. This particular consensus mechanism is relatively new, and most coins have not adopted it yet.
Best Crypto Staking Platforms In India
Here are the list of best crypto staking platforms in India
- CoinDCX: CoinDCX is the only popular Indian Exchange where you can stake your cryptocurrencies. If you don’t want to move your cryptocurrency to any other platform, then this is the only option to stake your crypto. Also you can lend your crypto and earn interest income on them.
- Binance: Binance offers staking and lending cryptocurrencies. It is worlds biggest crypto exchange and offers a great variety of options to generate passive income.
- BlockFi: BlockFi is basically an earning platform rather than staking platform. They are paid to account holders at the end of each month. It comes with zero hidden fees and zero minimum balance. All deposits and rewards are facilitated by BlockFi Wallet.
When You Should or Should Not Stake Crypto?
If you have a coin that works with the PoS mechanism, you can stake it to generate passive income. You should consider doing so if you do not plan to use the crypto in the near future.
There are many cryptocurrencies that will offer you the staking option. However, before you make a decision, you will want to study the cryptocurrency in detail. It is beneficial to invest in a crypto that has an attractive long-term outlook.
The PoS consensus is beneficial for both coins and crypto traders. This mechanism is capable of processing large volume transactions at nominal costs. At the same time, traders of these cryptos get the opportunity to earn passive income.
Also Read: Terra (Luna): A Beginner’s Guide To Terra Ecosystem
Factors of Staking Crypto
However, when searching for the available staking pools, you may want to look at the following factors:
- Reliability: You should know that you will not receive any rewards if the server of a staking pool is down. Thus, consider choosing a platform with an uptime of around 100%.
- Fees: Most staking pools charge a small amount of the staking reward as a fee. If you are not comfortable paying a huge fee, choose an affordable staking platform.
- Size: Smaller pools are less likely to become validators. However, they offer higher rewards if chosen to validate blocks. This is because these platforms do not have to divide the rewards as much.
However, ensure to stay away from a pool that is too small and is on the verge of failing. You should also know that some cryptocurrencies limit the reward amount one pool can earn.
Final Word
Any trader can participate in staking crypto. However, to become a validator, you will require substantial investment and technical knowledge. Participating in this complex process may also require some security considerations from your side. With proper comprehension of the staking process, you can grow your wealth considerably over time.
FAQs
Ans. It is the waiting period required for staking crypto. Within this time, you cannot transfer the crypto. Thus, you won’t be able to trade staked cryptos even if the price of the coin shifts. Thus, it is crucial to research the requirements for every project before staking.
Ans. There are certain risks involved with crypto staking. One of the primary downsides of staking coins is price changes. Note that cryptos that have a higher price offer more returns from staking. However, they also entail higher risk.
Ans. Traders can earn anywhere from 10% to 20% returns from staking cryptocurrencies, depending on the current market conditions. Over the long term, they can earn substantial rewards. However, you should note that rewards through such a process may change over time.
Ans. Risk-averse investors can stake stablecoins like Tether and USD Coins. Others can stake cryptocurrencies such as Cardano, Luna, Solana, Polkadot and Avalanche. Ethereum is the only cryptocurrency that you can both ‘mine’ and ‘stake’.
Ans. Irrespective of the platform you choose to stake crypto, it becomes a huge responsibility as you become a validator. If your computer goes offline, it could impact your operations, and you may have to pay penalties. These penalties can be minimal or significant depending on the blockchain.
Before you go…
- Looking for instant 🚀 personal loans 24*7 anywhere, anytime? Get personal loans up to ₹20 lakh starting at 9.9% p.a. Install the Navi app now!
- Or, maybe you’re looking to buy that house you’ve been eyeing 🏠 and you need a loan of up to ₹5 crore. Install the Navi app now and get instant in-principle approval right away! Interest rates starting at 8.60% p.a.
- How about an affordable health insurance policy 👨⚕️ starting at a monthly premium of just ₹235? Install the Navi app now and get your policy in under 2 minutes.
- Instead, want to put your savings into action and kick-start your investment journey 💸 But don’t have time to do research. Invest now with Navi Nifty 50 Index Fund, sit back, and earn from the top 50 companies.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.
Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
