What Is Crypto Staking?

Crypto staking is the main method of generating passive income in the cryptocurrency market. For several years, it has been an alternative to mining, which has become increasingly expensive and is often only available to large communities. Crypto staking has pushed a more familiar mining method aside in recent years and for many good reasons. In this article, we will tell you what staking is, what are the pros and cons of this method, how to start, and avoid the main risks.

What is Staking? 

Staking is holding a certain number of coins in your account (wallet) for a specific time period. Roughly speaking, you lock up your assets and let the blockchain use them to build its ecosystem, support transactions, and so on.

In exchange, you receive a certain percentage as your reward, which becomes your income if the situation on the cryptocurrency market remains stable. If the price goes down, you save your savings from inflation by increasing their quantity while they lose value. The situation every investor hopes for is when they earn staking income and also benefit from the price increase. There are also several types of staking.

Types of Crypto Staking

• Fixed or Locked Staking

In this type of staking, the owner of the cryptocurrency receives a fixed reward in the form of a percentage or a certain number of tokens for a certain period for completely blocking access to the assets for that period. 

• Flexible Staking

In this type of staking, its participants can flexibly manage their “frozen” tokens - add them to the staking pool or withdraw them from there without restrictions. The profitability in this case is usually lower than in fixed staking.

• Liquid Staking (DeFi-staking)

In this type of staking, locked tokens can be used as collateral for loans or other decentralized finance (DeFi) instruments.

• Delegated Staking

In this type of staking, token owners delegate them to other network participants, who use them for staking, and both participants share the reward received. Such a method is used when the entrance threshold is too high.

How Does Staking Work?

Staking, in general, applies only to those crypto-assets that circulate in blockchains supported by Proof-of-Stake (PoS) technology and its variants. The investment algorithm can also be implemented through electronic contracts or DeFi protocols. Staking allows the platform to confirm financial transactions, create new blocks, and issue coins.

To perform all these operations, the validator must hold the native tokens of the blockchain system on the account or wallet. The more there are, the higher the rewards. Many users prefer to keep their assets in their personal digital wallet and have full custody of them, which is why this type is referred to as custodial staking. In the other scenario, the custody over assets is given to the staking platform where the asset holder transfers their digital assets. It is a more risky staking type but can be more rewarding. 

PoS technology implies that the generation of blocks, control of transactions, and the ability to include them in a distributed database are played out between computing nodes. The size of digital assets blocked by a node affects the likelihood of performing the listed functions. 

For example, a computing node accounts for only 1% of all crypto assets, which means it will be able to process the same number of blocks. This is also reflected in the amount of the reward: it will also be 1% of the total volume. The calculation takes into account not only how much funds are placed, but also the time of holding the crypto and other characteristics. 

How to Make Money Staking Crypto?

If you want to set up earnings from crypto, you can stake according to a simple plan:

• Select a suitable digital asset and check if the project supports staking;
• Find a platform or wallet that offers staking functionality for your desired coin;
• Buy the desired cryptocurrency, and then place the crypto assets on the platform or wallet;
• Choose the desired staking period and type and start earning crypto.

Typically, PoS stakers receive payments once a month. On the service you choose, you will find instructions for working with a particular crypto coin. Your profit directly depends on which cryptocurrency you prefer. Basically, you can count on an income of 2-15% per annum from the amount of digital assets in your account

Investors should note that there are also offers online that are more attractive in terms of profitability. Unfortunately, often there are scammers behind them. Before you start staking, you need to make sure you are working with a platform that is reliable and as safe as possible.

Benefits and Risks of Crypto Staking

The main advantage of staking is the ability to receive passive income without the need to sell digital assets or part of them. The advantages of staking also include the following features:

• simplicity of the method;
• possibility of generating passive income without deep knowledge and experience;
• large selection of platforms, conditions, and tokens;
• opportunity to influence the development of the blockchain network.

At the same time, crypto staking also has a number of disadvantages and risks. These are:

• potential loss of funds due to network security failures;
• volatility of the cryptocurrency market;
• moderate profitability;
• impossibility or limited possibility of using frozen tokens.

Some experts also consider the potential risk for investors the fact that the US Securities and Exchange Commission (SEC) sees signs of securities in PoS cryptocurrencies. 

Conclusion

Staking continues to evolve and its role in the crypto space will play an important role in the future. With growing interest from large institutional players and the development of new technologies, crypto staking may become a more widely accepted investment method.

Crypto staking is suitable for crypto investors who plan to invest money for the long term. However, it should be remembered that cryptocurrency rates are quite volatile, and no one can say what their price will be in the future. At the same time, it is a much better option than simply holding the coins in a wallet and hoping for a rise in value. 

Investors should always remember that cryptocurrencies and staking come with risks. You should do your own research and, if possible, seek advice from a financial expert before making any decisions.