What is Crypto Staking? A Complete Guide 2022

by | Aug 6, 2022 | Market Trends, The Chain

In the world of cryptocurrency, there are various ways to earn rewards for holding your tokens.

One popular way to earn rewards is through staking. But, should you start crypto staking or is it better to invest your crypto somewhere else?

We’ll answer that and more in this article.

What Is Crypto Staking?

Before diving in too deep, let’s first answer precisely what crypto staking is.

In simple terms, crypto staking is holding funds in a cryptocurrency wallet to support the operations of a blockchain network.

When you stake your crypto, you’re essentially locking up your tokens so they cannot be traded on exchanges. In return for staking your crypto, you’ll receive rewards in the form of new coins or tokens.

The number of rewards you earn will depend on various factors, including the amount of crypto you have staked and the length of time that you have been staking your crypto.

Crypto staking is a popular way to earn rewards because it’s a passive income stream that requires little to no effort on your part.

How Crypto Staking Works

Now that we know what crypto staking is, let’s look at how it works.

When you stake your cryptocurrency, you’re essentially giving up your right to trade your tokens in exchange for the chance to earn rewards.

The staking process works by locking up your tokens in a wallet so they can’t be traded on exchanges. In return for staking your crypto, you’ll receive rewards in the form of new coins or tokens.

To start earning rewards through crypto staking, you must hold your tokens in a supported wallet. When you want to start staking your crypto, simply send your tokens to the address of the wallet that you’re using.

Once your tokens are in the wallet, they’ll automatically begin stake, and you’ll start earning rewards. The staking process is passive, which means you can earn rewards without work.

There are two ways of crypto staking, namely:

Staking Pools

Staking pools are a type of cryptocurrency investment fund that allows investors to pool their resources together to have a more significant stake in a particular coin or token.

Unlike staking exchanges, staking pools are still relatively unknown to investors worldwide and are approached with skepticism. However, staking pools use the proof of stake (POS) model.

Proof of stake is an alternative consensus algorithm to proof of work (POW). In POW, miners race each other to find the next block and are rewarded based on their computational power.

In POS, on the other hand, validators stake their tokens to be able to validate transactions and create new blocks. The more tokens a validator has staked, the greater their chances of being chosen to validate a transaction and earn rewards.

There are many benefits to using a staking pool. For one, it allows investors with less capital to still participate in staking. It also helps to increase the network’s security as there is less chance of a 51% attack (when one entity controls more than half of the network).

Choosing a Staking Pool

When choosing a staking pool, there are a few things you should take into consideration.

  • First, you’ll want to consider the size of the pool. A large pool is more likely to have a more significant stake in the network and, as a result, be able to earn more rewards. However, large pools also tend to have higher fees.
  • You’ll also want to consider the fees charged by the pool. Some pools charge a flat price, while others charge a percentage of your earnings.
  • Finally, you’ll want to consider the reputation of the pool. A reputable pool is more likely trustworthy and will pay your rewards on time.

Staking Exchanges

A staking exchange is a cryptocurrency exchange that allows users to buy and sell cryptocurrencies and also earn rewards for staking their coins.

Like staking pools, staking exchanges use the proof of stake consensus algorithm.

Staking exchanges offer many benefits over traditional exchanges. For one, they allow users to earn rewards simply by holding their coins on the exchange. They also tend to have lower fees than conventional exchanges.

Choosing a Staking Exchange

When choosing a staking exchange, there are a few things to consider:

  • First, you’ll want to consider the exchange fees. Some exchanges charge a flat fee, while others charge a percentage of your earnings.
  • You’ll also want to consider the reputation of the exchange. A reputable exchange is more likely to be trustworthy and pay out your rewards on time.
  • Finally, you’ll want to consider the security of the exchange. The best exchanges will offer multiple layers of security, such as two-factor authentication and cold storage.

Do All Currencies Have Staking?

No, not all cryptocurrencies offer staking as a way to earn rewards.

For staking to be available, the currency must be built on a proof-of-stake blockchain. That’s because staking is another way of reaching consensus on the network (i.e., verifying transactions and adding blocks to the blockchain).

So, if you want to stake your coins, you’ll need to ensure that your currency is based on a proof-of-stake blockchain. Some of the more popular proof-of-stake currencies include:

  • Avalanche (AVAX)
  • Luna (LUNA)
  • Ethereum (ETH)
  • Solana (SOL)
  • Polkadot (DOT)

Take note that these are just some of the supported cryptocurrencies.

Some stake-able cryptos can also be mined. The most notable of these cryptos is Ethereum. However, ether mining will be phased out as they fully transition to a proof-of-stake blockchain system.

Steps To Stake Crypto

Now that you know what crypto staking is, where you can do it, and which currencies you can use for staking, it’s finally time to know the exact steps you can take to start crypto staking.

It’s critical to remember that it’s not enough to just know what crypto staking is.

The steps for crypto staking require technical knowledge, a dedicated computer, and, often, a substantial investment. These things will help you perform validations without downtime, maximizing your crypto-staking potential without wasting too many resources.

Here are the steps to start cryptocurrency staking:

Choose a Crypto for Proof of Stake

The first step is to choose a cryptocurrency that you want to stake. As we said, there are several options out there. However, there are some considerations that you need to keep in mind when choosing crypto for proof-of-stake, such as:

  • The exit strategy: How easy is it to convert your stake into fiat or other cryptos?
  • How much you’re willing to risk: Keep in mind that staking is still a new technology, and there’s always the chance that something could go wrong.
  • Your staking goals: What are you hoping to achieve by staking your coins? Are you looking to earn rewards or help secure the network?

As we said, it’s crucial to do your research. Keep these things in mind as you look over your options, so you’ll find the best cryptocurrency for your needs.

Transfer Your Crypto to Your Blockchain Wallet

The next step is to create a blockchain wallet and transfer your crypto to that blockchain wallet. This is important because it’s how you’ll receive your staking rewards.

There are many different types of wallets, so you’ll need to research to find the best one for you.

However, we recommend using a software wallet like Atomic Wallet or Trust Wallet. These are easy to use and offer excellent security features.

Once you’ve chosen a wallet, simply send your coins from your current exchange or wallet to your new blockchain wallet.

Note: Some proof-of-stake blockchains will require you to have a minimum amount of coins to start staking. For example, Ethereum requires 32 ETH (worth around USD 47,000).

Join a Staking Pool or Exchanges

The next step is to choose a staking pool. This is important because it will help you earn rewards more consistently.

When you stake your coins on your own, there’s a chance that you won’t be chosen to validate blocks often. However, when you stake your coins in a pool, you’ll be able to receive rewards more frequently.

There are many different staking pools, so you’ll need to do your research to find the best one for you. Some things you may want to consider include:

  • Fees: How much does the pool charge?
  • Minimum balance: Does the pool have a minimum balance requirement?
  • Delegation limit: How many coins can you delegate?

Once you’ve found a good staking pool, send your coins to the pool’s address.

Another option is to join a staking exchange.

As we said, a staking exchange is similar to a traditional stock exchange. Still, instead of stocks, you trade cryptocurrencies that are being staked.

These exchanges allow you to buy and sell stakes in different cryptocurrencies and provide information on the current stake rates.

Joining a staking exchange can be an excellent way to start staking, especially if you’re unsure which cryptocurrency you want to stake. It also allows you to trade your stakes for other assets if you exit your position.

Start Staking Your Crypto

The final step is to start staking your cryptocurrency.

This usually involves setting up a staking node and configuring it to connect to the network. Again, this requires technical knowledge, so we recommend doing your research or hiring someone who can do it for you.

Once your node is set up, you’ll be able to start validating blocks and earning rewards!

Pros and Cons of Cryptocurrency Staking

Crypto staking has its share of risks and rewards you need to know. While staking is generally rewarding, it’s not uncommon to see people committing mistakes when crypto staking, especially if they didn’t do enough research.

Here are some pros and cons for you when you start crypto staking:

Pros

You Can Earn More “Tokens”

You can earn more of the same cryptocurrency when you stake your coins. This is because most cryptocurrencies use a proof-of-stake consensus algorithm, which rewards stakers for validating blocks.

The more coins you stake, the higher your chances of being chosen to validate a block and the more rewards you’ll earn. This is similar to how interest works in the traditional financial system.

However, it’s important to note that rewards are not guaranteed, as they are given out randomly.

Staking Requires Less Resources

Another advantage of staking is that it requires fewer resources than mining.

This is because staking is simply a process of holding coins in your wallet. At the same time, mining requires specialized hardware and consumes a lot of energy.

This can be great for beginners since they won’t have to stay up all night to earn rewards.

Staking Can Help Secure the Network

You’re essentially helping secure the network when you stake your coins. This is because stakers are the ones who validate blocks and prevent fraud.

As a result, most blockchains reward stakers for their efforts.

Not only does this provide an incentive for people to stake their coins, but it also helps to ensure that the network remains secure.

Staking Can Help You Grow Your Holdings

Finally, staking can be a great way to passively grow your holdings.

This is because you’ll be able to earn rewards just by holding your coins in your wallet and keeping your node online.

Of course, this isn’t guaranteed, as rewards are given out randomly. But you should see your holdings grow over time if you continue to stake them.

Cons

Cryptocurrency Is Still Volatile

One of the most significant disadvantages of staking is that cryptocurrency is still volatile.

Prices can swing up and down rapidly, which can make it difficult to predict what your rewards will be. Furthermore, if the price of the cryptocurrency you’re staking falls too low, you may lose money.

Your Stakes May Be Slashed

Another potential downside is that your stakes may be slashed as a penalty for incurring mistakes while staking. This commonly happens when you have a node that performs poorly, or you’re operating dishonestly.

Of course, this isn’t always the case, but it’s something to be aware of.

Staking Includes Fees

Last but not least, staking usually comes with fees. For example, most exchanges will charge you a fee for staking your coins.

These fees can eat into your rewards, so it’s essential to consider them when deciding whether or not to stake your coins.

Conclusion: Is Crypto Staking for You?

While staking is still a new practice in cryptocurrency, it’s a worthwhile venture for its rewards, especially if you’re looking for a passive income stream. However, it comes with its own risk, so you still have to do your homework to prevent possible losses.

Crypto staking is beginner-friendly, and you’ll have plenty of support from different cryptocurrency resources such as this one.

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