With cryptocurrency, the most simple way to make a profit is by selling the investments when the market price is high. There are various other ways to make money in cryptocurrency, and one such way is staking. With staking crypto, you have the power of putting your digital assets to work and make some passive income without having to sell them.
Staking is a lot like depositing cash in a high-return-giving savings account. Banks lend your deposits, and depending on your account balance, you earn the interest. Theoretically, stalking is no different than the bank deposit model. Here we have put together everything that you need to know about crypto staking.
What Does Staking Crypto Mean?
Like many different things in cryptocurrency, staking might seem like a difficult idea. For some, it might seem like something extremely simple. This depends on the level of understanding you have on the matter or how much you want to learn about it.
The basic knowledge that you should have about staking is that it is a war in which you can earn rewards while you hold onto certain cryptos. But even if your main motive is to earn some rewards, you should know a little bit about how this works and why this works the way it does.
How Does It Work?
If any of the cryptos you own allow you to stake, then you can stake a few of your cryptocurrencies to earn some reward over time. Current options that allow staking are Tezos, Cardano, Ethereum, Cosmos, Cardano, and some others.
The reason why your cryptocurrency will earn rewards when you put them up for staking is because the blockchain will put it up to work. Cryptos that all you to stake use a different form of mechanism known as the “consensus mechanism.”
This is the way through which they ensure that all your transactions are verified and kept secure. And they do it without the help of a bank or any sort of a payment processor in the middle. If you plan on staking, then your cryptos become a part of this process.
Why Do Only A Few Cryptos Have Staking?
This is the place where everything gets technical. For example, bitcoin does not allow staking, and to know the reason, we have to get to know a little bit about the background.
- Cryptocurrencies are mostly decentralized, which means there is not any central authority behind all of this. Now the question arises, if they are not connected through any central force, then how do they come to the correct answer without getting it from any central authority? They use a special mechanism known as the “concensus mechanism.”
- Many cryptos like Ethereum 1.0 and Bitcoin use this mechanism known as Proof of Work. With proof of work, the network throws a lot of processing power towards solving problems like transaction validation between some strangers who live poles apart and ensures that no person spends the same money twice.
It also involves a part where miners from all the whole world compete at solving a cryptographic puzzle. The winner is rewarded with the right to add the recent block of the verified transactions in the blockchain and get some crypto back in return.
Advantages Of Staking
There are a few advantages of staking crypto. Let’s see what those are:
Passive Income
If you do not have any plan for selling the crypto tokens you own in the future, you can put them up for staking and earn some passive income. You cannot generate any of the income from cryptocurrency if you do not invest in crypto staking.
Easy To Start
Staking it easy to start. All you need is an exchange or a crypto wallet.
Support Other Crypto Projects
According to the co-founder and COO of the National Digital Asset Exchange, Tanim Rasul, “Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks. This also strengthen its ability to process transactions.”
Risks Of Staking
With every type of investment, there are risks involved, especially in cryptocurrency. Let’s see what are the risks involved with staking.
- Cryptocurrencies are, by nature, volatile. A sudden price drop can outweigh all the rewards that you have earned. Stalking is best for those who plan to hold on to their assets for the long term inspite of the changes in price.
- Some coins have a lock-up period during which you cannot withdraw your assets from the process of staking.
- When you choose to withdraw the assets from staking, there is going to be a particular waiting period for every blockchain before you can get back your coins.
- There is always a counterparty risk for the staking pool operator. And if the validator does not do their job properly and somehow gets penalized, you will not get your rewards.
- It is always possible to hack a staking pool. Which means there could be a total loss in the staked funds. And these assets are not backed by insurance, which means there is almost no chance of compensation.
Bottom Line
Staking is something that is open to all, and anybody who wants to participate can. Becoming a validator might require a certain number of tokens, some technical knowledge, and a computer that can go through the validations all day long without any downtime.
This level of participation requires some serious security considerations. This is because downtime can negatively impact the validator’s stake and cause them huge losses. However, there is a simple way of participating for the majority of participants. They can participate via exchanges like Coinbase. Here, you can contribute whatever amount you want. And there is no need to purchase or operate through any expensive validator hardware.
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