What is staking in crypto?

What does staking mean in crypto?

Why can you stake only particular cryptocurrencies?

What is Proof of Stake?

How much can you earn with staking?

Potential APY of different PoS coins as of 12 Jan 2022

What are the advantages of staking coins?

  • Staking cryptocurrencies is considered an easy way to earn interest on your holdings, as you do not need any equipment or technical knowledge to earn rewards.
  • You contribute to the blockchain of a particular digital asset. By locking your tokens, you help secure the network.
  • The Proof of Stake protocol is far less energy-intensive than the Proof of Work protocol. Therefore, you do not need to maintain a supercomputer with adequate energy resources to participate. In this way, PoS saves energy and keeps carbon emissions low.
  • PoS protocols offer higher transaction throughput and lower fees, as proven by blockchains like Solana, EOS, Cardano.
  • In the PoS protocol, the supply of cryptocurrency is distributed among users in proportion to their holdings of the currency rather than their work. This consensus model is considered more decentralized and secure than Proof of Work because a PoW miner, which controls 51% of the network’s hash rate, can effectively control the blockchain and process transactions to its advantage.

What are the risks associated with staking crypto?

Staking is not entirely risk-free:

  • The most significant disadvantage of the Proof of Stake consensus model is that large players can have extraordinary influence over the network. This means that the coins are more concentrated with fewer holders. Therefore, as the stakes increase, a PoS network becomes more centralized. While new mechanisms have been developed to circumvent this problem, your chances of being selected as a validator are proportional to the number of coins you staked. Therefore, this problem can never be avoided entirely.
  • Another drawback is that blockchains usually require a minimum stake size to validate transactions. For instance, Ethereum and Dash only allow you to validate transactions if you have staked at least 32 ETH or 1000 DASH, respectively. This discourages many people from running nodes because they have to invest a large amount of money. Instead, they can enter centralized platforms that allow them to stake less than the minimum.
  • To earn interest in your cryptocurrency, you need to lock your coins for a certain period. You cannot use your assets during this period of time, such as sell or lend.
  • Crypto prices are very volatile. Therefore, you should be aware of the risk that the value of your assets will fall if you use them. So you should be aware that a sharp drop in the price of the digital asset you are staking can “eat up” your interest income. This is especially true for new cryptocurrencies that offer you extremely high returns. However, staking stablecoins can mitigate this risk.
  • If you need to unblock your stake for trading cryptocurrencies, you should be aware of a minimum blocking period. So, check these before you lock your assets to avoid any unpleasant surprises.
  • Another risk with staking cryptocurrency is becoming a victim of a so-called “rug pull .” These are malicious project teams that artificially inflate a currency’s staking rewards, then dump their holdings once most people have staked.

How do I start staking?

Among the most popular staking providers are crypto wallets and exchanges:

  • Centralized exchanges such as Binance, Coinbase, or PointPay offer staking services for their customers.
  • Staking-as-a-service platforms, also known as soft staking, are another option. Unlike wallets, projects like Stake Capital or MyCointainer are designed exclusively for staking. They take a percentage of earned rewards to cover commissions.

The step-by-step process of crypto staking explained

Follow these steps to get started with crypto staking.

  1. First, choose a PoS cryptocurrency you would like to stake.

Conclusion

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