By utilizing certain cryptocurrencies to verify transactions on a specific blockchain network, crypto staking can help you earn passive income. Yields that exceed what’s available from a typical saving account are provided to users through staking and crypto mining. However, both staking and crypto mining are very different from each other.
The crypto staking jargon might sound complicated to some people, but you can easily comprehend it by looking at the simple principles and rules of the process. For everyday users, the process of crypto staking is becoming easier to understand because of an increasing number of online exchanges that aim to make crypto staking simpler.
It is advisable first to understand how the process of crypto staking works as it can help you determine whether you should use your holdings for crypto staking or not and understand which cryptocurrencies you can pledge and the risk involved in the process.
What Is Crypto Staking?
The process of crypto staking has become a significant part of the technology behind specific cryptocurrencies.
Getting basic information about what blockchain networks do can help you understand the process of crypto staking more easily.
Some details regarding what is crypto staking are provided below.
For instance, there is no intermediary, a bank in blockchain networks, to examine the new activity and make sure it comports with the records maintained by computers across the network, making the blockchain networks decentralized.
Instead, an unchangeable historical record is formulated when users accumulate the blocks of current transactions and submit them for inclusion. A transaction fee is delivered in cryptocurrency to users whose blocks are approved.
To avoid frauds and omissions in this process, crypto staking is utilized. The users propose a new block or recommend voting to adopt a new block to propel playing by the rules.
Typically in crypto staking, the possibility of the users receiving transaction fee rewards gets more promising with the more that is at stake. However, the user can forfeit some of his stakes in a procedure known as slashing if the block suggested by the user is found to have incorrect data.
In the video below by Whiteboard Crypto, you can learn more about crypto staking, how to set it up, and its benefits.
Which Cryptocurrencies Allow Staking?
Crypto staking is now a part of several prominent cryptocurrencies. A cryptocurrency is competent for crypto staking if it is correlated to a proof of stake blockchain, which uses the incentive mentioned above mechanism.
Though crypto staking may differ from blockchain to blockchain, the process can be made simpler to navigate as some popular cryptocurrency exchanges provide staking features that support certain crypto assets.
Presently, for most people holding algo ( the native currency of the Algorand blockchain ), the largest crypto exchange in the U.S., Coinbase, turns on crypto staking on its platform automatically. Coinbase stated that the users could benefit from this strategy by earning a 4% annual percentage yield.
The native token of the Ethereum network and the second-largest crypto asset by market capitalization known as ether, or ETH, is the most significant crypto asset that supports crypto staking.
Solana and Cardano are some other prominent cryptocurrency exchanges that support crypto staking.
Though remember that all cryptocurrency networks do not support crypto staking.
A different method of validating transactions is adopted by Bitcoin, the most beneficial cryptocurrency by far. The process is called proof of work. Before submitting a new block and attaining the potential rewards, the users are asked to expend massive computational effort as the process relies on energy-intensive crypto mining.
However, some crypto exchanges and other financial firms provide the ability that enables the users to gain interest in bitcoin and other digital assets without crypto staking by lending out their cryptocurrencies.
How Do You Stake Cryptocurrency?
Depending on how much of a financial, research, and technical commitment you are willing to make, you can find several methods to start staking cryptocurrency. Your first step would be to decide whether to entrust your cryptocurrency to someone doing that legwork for you or authenticate transactions using your computer.
Crypto networks that support crypto staking allow people who own tokens to provide the tokens for other users to deploy in validating transactions, thereby attaining a share of the rewards.
Using an exchange
Using an online service to stake your tokens is the simplest option for you. Crypto staking is offered in exchange for a commission by some popular cryptocurrency exchanges.
The head of the crypto native at BlockFi, a financial services firm focused on crypto, Rob Margolis, stated that it is probably in the best interest of most investors to use the resources provided by an exchange.
Rob Margolis, who oversees relationships with BlockFi clients, for instance, crypto miners, businesses, and funds, further stated,
“if you are looking at it from the point of view of an average user, crypto staking service is offered by many of the major centralized platforms and they execute it with the best infrastructure providers in the space.”
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Exchanges That Offer Staking
NerdWallet surveyed all the crypto exchanges and found out that three of all the crypto networks offer crypto staking for at least some crypto assets. These three crypto exchanges are Binance.US, Coinbase, and eToro. Reward programs are provided by other crypto exchanges that allow users to reap additional crypto in a way that is mainly identical to crypto staking.
You can join a staking pool supervised by another user if you are having difficulty finding a crypto exchange that supports the token you want to stake or if you are not willing to trust a crypto network to make decisions for you related to your crypto staking.
To join a staking pool, you will be required to know how to use a crypto wallet so you can easily connect your tokens with the validators staking pool.
The information about how to research the validators is provided by the official websites. It includes websites with any proof of stake blockchain networks that also entails links to details about how they perform.
For instance, at Beaconcha, you can find some potentially helpful information on the Ethereum system.
The data engineering lead at Boston-based analytics firm Flipside Crypto, Omkar Bhat, advised looking carefully at a prospective validator’s track record.
Looking at the publicly available information, you can determine whether a staking pool operator has ever been reprimanded for faults or misdeeds. For protecting people who delegate tokens, some also lay out their policies. You can also look at other details, such as the level of fees or commissions.
Omkar Bhat further suggested that it is good to select a staking pool that is established, but the staking pool that is the absolute biggest should be avoided. Blockchain networks are supposed to be decentralized to get a statement to prevent any one group from acquiring too much significance.
Bhat further says,
“To improve the decentralization of an ecosystem, people often entrust their tokens to validators with lower voting power.”
Becoming a validator
Crypto staking can get complicated if you set up your crypto staking infrastructure. A downloaded copy of the entire transaction history of a blockchain network, proper computing equipment, and software is required for it. Setting up a crypto staking infrastructure can also have a high entry cost.
For instance, you would need approximately 32 ETH to start on the Ethereum network, which would be worth about $84,000 on January 31, 2022. However, if you join a staking pool or use an online service for crypto staking, you will not be asked to follow such regulations.
What Kind Of Returns Does Crypto Staking Offer?
Depending on the cryptocurrency conditions ( for instance, the demand on the blockchain network being considered) and the procedure you utilize, the rewards for crypto staking can diversify. However, you can get some insight into what you can expect from the rates offered by the crypto exchange.
For instance, in late January of 2022, it was assessed by Binance.US that for crypto staking algo, the range of annual rewards would be from 4.5 to 6.5%. The yearly percentage gain of algo was 4% for Coinbase, and similarly, ether had algo at a 4.5% annual percentage rate.
For the sake of comparison, it was reviewed by NerdWallet that the yields were generally around 0.5% APY on savings accounts. Moreover, according to the Federal Deposit Insurance Corporation, the average yield of the U.S. savings accounts is 0.06% APY.
However, remember that crypto staking might not be for everyone. Before deciding whether to stake your crypto, you should ask a few questions.
In crypto staking for a set period, your assets are committed during which you would not be able to get access to them to sell or trade your assets. Before staking your crypto, do not forget to carefully look at the terms if you plan to move it on short notice.
You should never forget that crypto is a volatile investment. Although in investment return, crypto staking can provide you with a measure of predictability, the rewards you are getting from crypto staking might not look as impressive if the market value drops by 20%, for instance, when you are staking it.
Ultimately, it depends on whether you feel confident that crypto staking is a good investment over the long term when deciding to stake your cryptocurrency.
For instance, your desire to sell your assets may not be affected by the day-to-day swings in crypto value if you are confident in the value of the Ethereum network. Margolis stated that to get a short-term deal from the crypto investment you want to hold onto, crypto staking is an option.
Margolis further said,
“If you have a fundamental perspective of the asset and you are holding tokens in your portfolio, then the question arises while the asset sits in your portfolio what do you want to do with it?”
Wrap Up
For some users, crypto staking and the risks and rewards might be the answer. After an initial investment in crypto staking, daily efforts are not required by the users, which makes crypto staking a way to earn passive income.
Some of the cryptocurrency owners might find crypto staking a good option. However, there are other ways as well to earn passive income. It might help you to look for some of those options as well.