Jun 30, 2022
What Is Crypto Staking?
Crypto staking is a way to invest in cryptocurrency by temporarily pledging coins to facilitate transaction validation and network security. In return, you may receive passive income in the form of staking rewards and interest on your holdings.
In this article, we’ll cover:
- How crypto staking works
- Proof of stake vs. proof of work
- Cryptocurrencies that use proof of stake
- Steps to stake crypto
- Advantages of staking crypto
- Risks of staking crypto
How does crypto staking work?
Cryptocurrencies are decentralized and user-managed. There’s no bank to keep track of who owns a coin or token, so cryptocurrency owners share the responsibility for keeping records and preventing fraud. Owners can do that in one of two ways: a proof-of-work model or a proof-of-stake model. Proof-of-stake is enabled by crypto staking.
What is crypto staking’s appeal? For most people, it’s either making money as a validator or earning passive income by loaning coins to a validator.
Staking crypto as an individual
In the proof-of-stake model, each group of records is checked by a validator, who earns coins for their work. To become a validator, an individual must meet technical requirements and put up a “stake” of coins; hence the term “proof-of-stake.” Depending on the cryptocurrency, the minimum stake can be worth thousands of dollars.
Validators are chosen at random, but the larger a validator’s stake is, the more likely they are to be chosen. If the validator accepts fraudulent transactions, goes offline for too long, or breaks other rules, they may forfeit their staked assets and have their privileges revoked.
Staking crypto via pools and exchanges
Not everyone is willing or able to pledge a full stake, but validators don’t have to use their own assets. Instead, they can borrow small amounts from multiple investors. If the validator earns coins, investors earn staking rewards and the validator gets a commission. Investors can join a stake pool or use an exchange to participate in staking; they then earn passive income based on how much they contribute to the stake.
Proof-of-stake vs proof-of-work
Most cryptocurrencies’ coins and tokens are stored in a blockchain. Proof-of-stake and proof-of-work are two ways of verifying new transaction blocks before adding them to the chain.
- Proof of stake model (PoS): Validators are chosen at random to verify blocks. If they follow the rules, they get coins. If not, they lose coins.
- Proof of work model (PoW): Miners compete to be the first to verify and encrypt a block so it can be added to the blockchain. The winner gets coins as a reward.
|Proof of stake model (PoS)
|Proof of work model (PoW)
|Validators are chosen at random to verify blocks. If they follow the rules, they get coins. If not, they lose coins.
|Miners compete to be the first to verify and encrypt a block so it can be added to the blockchain. The winner gets coins as a reward.
|Strong anti-fraud protection, more energy-efficient than mining, faster and more scalable
|Strong anti-fraud protection, enables decentralized currencies
|Lacks long-term track record
|Mining causes environmental harm
Crypto staking is only an option with currencies that offer a proof-of stake-model; not all currencies do. Here are some popular currencies that allow staking:
- Ethereum (ETH)
- Cardano (ADA)
- Solana (SOL)
- Luna (LUNA)
- Avalanche (AVAX)
- Polkadot (DOT)
Steps to begin crypto staking
What is the crypto staking process like? It all depends on how you want to stake: via an exchange, in a pool, or as a validator.
Option one: Staking with an exchange
If you want to keep things simple, you might consider using an online exchange. Exchanges typically handle the relationship with the validator for you.
- Choose the currency you’d like to stake. It’s smart to do your due diligence when picking a currency. You might consider how long it’s been around and its track record so far. Newer and smaller currencies can be especially volatile, but might offer higher returns.
- Shop around to find the right exchange. It’s usually helpful to compare commission fees, minimum required balances, exchange reputation, and other rules. For example, you might not be able to withdraw your stake immediately if you want to pull out.
- Set up a crypto wallet. A crypto wallet is similar to a traditional wallet; it keeps your digital money secure. You’ll need one to buy coins and start crypto staking.
- Open an account on the exchange. The rules and processes will vary based on the exchange you pick. It’s a good idea to regularly monitor your account to track performance.
Option two: Staking with a pool
You can also join a staking pool directly. This approach requires more work from the investor, but offers greater flexibility.
- Choose a currency and find a pool. Research currencies and the staking pools available. When choosing a staking pool, it’s critical to carefully assess the validator’s track record, including penalties incurred in the past, commission fees, and the guarantees they offer. You can often learn how to investigate validators on the currency’s official website.
- Buy crypto and a crypto wallet. Similar to staking through an exchange, you’ll need a crypto wallet to buy cryptocurrency and add your coins to the pool.
- Join the pool and monitor performance. Once you’re in the pool, keep track of staking rewards, losses, and other performance.
Option three: Staking as a validator
If you have the tech know-how, you can stake crypto as a validator.
- Research requirements and choose a currency. Each currency has different requirements, which you’ll generally find on the currency’s website. Pay attention to the details, as you can lose coins if you don’t follow the rules.
- Get your tech and stake together. You’ll need a reliable internet connection, a dedicated computer with the right specs and software, and a stake.
- Buy coins and make your stake. You’ll need a crypto wallet, of course, and coins in the currency you want to stake. Once you make your stake, remember that validators are chosen at random, so you may have to be patient as you wait for the opportunity to get started
Benefits of staking crypto
Investors stake crypto in hopes of earning a return, and sometimes the returns can be significant. Potential benefits include:
- Receiving staking rewards in the form of additional coins
- Earning interest on crypto investments
- Participating in community efforts to keep currency secure
Risks of crypto staking
The risks of crypto staking are real, and investors can lose part or all of their investments. Risks to consider include that:
- Crypto is volatile and can lose value quickly.
- Waiting periods for withdrawals are common.
- Validator commission fees can eat into returns.
- If the validator performs poorly, you could lose money.
- Your money is not insured against hacks and fraud.
Is crypto staking worth it for you?
Crypto staking may have exciting earning potential, but it comes with risks too. If losing your coins would torpedo your financial plan, crypto staking isn’t a match for your investment needs. Investors with a high-risk tolerance and a long time horizon, however, may be well-positioned to ride out crypto volatility. And if you are passionate about supporting a particular currency, crypto staking may be an appealing way to support it while potentially earning passive income.
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