Crypto staking is a great way to earn passive income, rewards, and high interest rates and participate in crypto. It uses a protocol that many believe is the future of crypto.
But before you start staking, it’s essential to fully understand how crypto staking works and what its risks and benefits are.
Crypto staking occurs when users "stake"—or lock up—their crypto assets for earning rewards. Staking requires users to commit their assets to the blockchain to validate cryptocurrency transactions and ensure integrity of the blockchain. It works with cryptocurrencies that use a proof-of-stake (PoS) consensus mechanism to validate transactions. PoS protocols are an alternative over proof-of-work (PoW). PoS relies on users within the system to validate transactions, whereas PoW relies on external miners who compete on computing power for the right to validate transactions to receive rewards for their efforts. Staking has become a popular method for users to generate passive income due to specific networks offering high interest rates for various crypto stakes.
Staking uses a PoS consensus mechanism, which is a method used by blockchains to identify and employ reliable users—called “validators”—to validate and authenticate the legitimacy of new blocks.
Validators are rewarded for their efforts by receiving any blockchain’s native cryptocurrency—the more a validator stakes, the greater their opportunity to earn staking rewards.
There are many flavors of crypto staking that all have their own tradeoffs, but the general idea is that users are incentivized to act in the best interest of the blockchain as they lock money that gets destroyed if they act maliciously.
PoS is a consensus mechanism blockchains use to process and verify cryptocurrency transactions when generating new blocks.
But what’s a consensus mechanism, you ask?
A consensus mechanism uses protocols to ensure the security of a registry that holds the records of a blockchain's transactions. Blockchains use PoS to secure crypto transactions depending on the amount of crypto each validator locks up. This amount varies from network to network. For example, Ethereum validators must own at least 32 ether (ETH) to operate securely. Staking is carried out in 32 ETH increments, each of which has a unique set of balance. 32 ETH is a validator's initial balance, which also provides them voting power. Staking more than 32 ETH has no influence on rewards as each validator is authorized 32 ETH for maximum voting power.
Unlike PoW, PoS eliminates the need for advanced hardware since validators don't need the computational power for verification purposes. As a result, PoS is an energy-efficient method for blockchains to securely verify transactions while reducing their carbon footprint.
If you want to stake a cryptocurrency, you must first ensure your choice of digital currency is connected to a blockchain that uses a PoS consensus mechanism. Here are some of the best cryptocurrencies one can stake, ranging from the highest market cap to the lowest:
Before we discuss the difference between crypto staking and crypto mining, we must understand their similarities.
Staking and mining are both examples of consensus mechanisms. However, mining uses a PoW consensus mechanism, while staking uses PoS.
Mining involves advanced hardware, and technical know-how to mine new blocks. The first miner to generate a new block receives rewards in the form of a blockchain’s native cryptocurrency. Proof-of-work uses a large amount of power because all miners around the world must run their computers to attempt to be chosen to validate, as the work of all miners who don’t win is wasted.
Staking, however, is a more energy-efficient approach. Instead of employing miners who solve complex problems with advanced hardware, its PoS consensus mechanism requires validators who stake coins in exchange for rewards. PoS also increases a blockchain's security and reliability while increasing processing speeds with lower transaction fees.
Additionally, staking uses far less energy than mining. Ethereum 2.0 blockchain, the successor of Ethereum’s current blockchain, is transitioning to a PoS model that’s estimated to use around 99.95% less energy than its predecessor.
One of the main advantages of staking is that users can potentially earn additional cryptocurrency on top of their deposited coins. Furthermore, certain blockchains have interest rates that are often relatively high.
Some networks enable users to make around 10–20% annually on their initial investments. As in all investing, users should be skeptical of abnormally high interest rates on some assets, as they tend to be unstable. In short, crypto staking can be a lucrative investment model for passive income or interest building. The only caveat is users require a cryptocurrency linked to a blockchain that uses a PoS consensus mechanism.
In addition to passive income and high interest rates, crypto staking offers the following advantages:
If you’re looking to start staking crypto, consider taking into account the following:
Most blockchains require users to stake their cryptocurrency for a fixed period of time—known as a lock-up period—making their coins inaccessible for use. While this could benefit some users who may enjoy high interest rates, it's important to consider crypto's volatility. As a result, sharp drops in a coin's market value will render a user helpless when they want to limit their losses by selling but aren't able to access their crypto.
Crypto staking may not be as expensive as mining, but it's by no means cheap. Staking can cost a user hundreds of thousands of dollars depending on the hardware involved. Users who wish to stake coins first require a strong internet connection, powerful computer hardware, and a reliable electrical connection to create a node, which is essentially a computer system that has a copy of all the transactions that take place on any given blockchain.
Staking incentives aren't often given out on a regular basis; many blockchains can delay rewards. As a result, users may have to exercise patience while waiting for rewards they intend to use for reinvestment or other purposes. This can impact any investment portfolio as a whole.
Users can stake cryptocurrencies through various methods. Here, we’ll cover the three most common:
Individuals who have enough of a cryptocurrency to stake may decide to do it on-chain, gaining 100% of their staking profits without having to share fees with a third party.
This is the most profitable way to stake, but usually requires some type of technical expertise. Additionally, some cryptocurrencies require users to have a minimum amount of crypto to stake, making it unattainable for users with lower amounts of that currency.
Staking pools are made up of cryptocurrency assets that multiple users combine to increase their chances of receiving rewards. Pools allow users with less than 32 ETH to participate, so it’s not necessary to have the technical know-how to join a pool.
Staking pools usually require users to transfer funds into a crypto wallet before participating in the pool's staking process. Once you have enough funds, you can select a staking pool and contribute by transferring coins via your crypto wallet.
However, it’s worth considering that staking pools take a commission of your earnings, so you don’t receive rewards in full. Some arguments claim that staking pools become too expensive and exercise significant control over a blockchain.
Crypto exchanges allow you to stake crypto through blockchains that run a PoS consensus mechanism with compatible cryptocurrencies. These stakes will appear on a staking page or as a staking option in your investment portfolio. It’s worth noting that some exchanges take a significant cut of your initial investment. You can generally find out more about each exchange's services on their terms and services page.
You can also stake crypto yourself if you choose to run a node. However, this requires adequate resources and technical know-how, making it less appealing for many users.
Staking can be a lucrative income stream, although it comes with various risks that you should consider if you don’t want to lose your cryptocurrency.
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