What is crypto staking?
The development of the crypto industry has led to the emergence of new ways of making money, including those available to ordinary people: crypto trading, investing, mining and more. In this article, we'll discuss one way to make money: crypto staking.
What is cryptocurrency staking?
Until recently, few people heard the term "crypto staking", but now it is gaining momentum, with more and more people around the world trying to make money on it.
What is staking in crypto?
Staking is a process of storing funds in a cryptocurrency wallet to get a chance to validate transactions in a block, while the person storing the funds receives a reward. This feature is only available with cryptocurrencies that run on Proof-of-Stake (PoS) or similar algorithms. For such cryptocurrencies, staking is a mechanism that replaces mining. Thus, validators — which are called forgers in PoS-based blockchains – essentially function as miners.
How does crypto staking work?
In PoS cryptocurrencies, the chance to add a new block to the blockchain and receive a reward for this is proportional to the number of coins that the user (called the validator) holds and reserves for this purpose. In addition, other indicators can be taken into account, for example, the age of the stake.
From a user's point of view, staking is simple. The user buys cryptocurrency on the exchange or through another means and then blocks it on a crypto wallet that supports staking. The funds are in the wallet, and the user receives a reward. In this way, staking is similar to a bank deposit. In most cases, the wallet needs to be constantly online and synchronised with the blockchain.
The user can stop the staking process at any time and spend the funds.
Cold crypto staking
Since the device from which crypto staking is performed must be constantly connected to the network, it's at risk of being hacked. To solve this problem, a 'cold staking' mechanism has been developed. The cold staking process relies on a smart contract that delegates the staking authority to a staking node. The staking node is always online but doesn't contain private keys. Such a node provides resources for the blockchain and stakes on behalf of another wallet without being able to spend coins.
Particl Coin was among one of the first projects to successfully implement cold staking. Other cryptocurrencies with cold staking options are Stratis and NavCoin.
What is a crypto staking pool?
Since the chance of winning the next block for verification (and thus receiving a reward) directly depends on the number of tokens in a user's wallet, it may be advantageous to combine into pools that divide profit among all participants in proportion to the invested share. Such staking pools resemble the traditional mining pools. This method is convenient for novice validators with a small number of coins, especially if the minimum stake in this blockchain is high enough.
Is staking crypto worth it?
The answer to this question depends on your approach to making money. The possibility of receiving a reward only for storing cryptocurrency looks is an attractive offer, but, unfortunately, you shouldn't expect significant profit.
The goal of Proof-of-Stake is to be the most efficient way to keep a public blockchain validated, not to maximise rewards for a specific use case. - Vitalik Buterin
Like any other method of making money, crypto staking has advantages and disadvantages that you should examine before deciding whether to stake your crypto holdings.
The advantages and disadvantages of crypto staking
Crypto coins staking has several advantages that have helped it gain popularity:
- This type of income is passive for users. Once the staking process has started, it requires only minimal attention.
- Low energy consumption and environmental friendliness. Unlike mining, staking requires a lot less electricity.
- Staking crypto coins doesn't require any specialised knowledge or skills.
- To stake crypto, you don't need to invest in expensive equipment and electricity bills. A small investment in the purchase of cryptocurrency will be enough to get started, so the threshold for entering this way of earning is quite low.
- Cryptocurrencies based on the PoS algorithm are thought to be much better protected from a 51% attack, which reduces the risk for their holders and, therefore, for validators.
Of course, staking has its drawbacks.
- Perhaps the biggest risk factor when staking crypto is cryptocurrency volatility. If an increase in the price of a cryptocurrency noticeably augments the profit from staking purely due to a higher value for the coins, a bearish trend sees the opposite happen. Losses from the decrease in the value of the stored cryptocurrency can easily exceed the profit made from staking.
- Despite the noticeable risk of a drop in the price of the cryptocurrency used for staking, the profit margin is relatively modest; it doesn't exceed 15% per year for the most popular coins.
Advantages and disadvantages of crypto staking
The fall in the price of a cryptocurrency will result in losses
Relatively low profit
No specialised skills required
Low barriers to entry
Very low risk of a 51% attack
With these facts in mind, staking is a good option for additional income for people who invest in crypto coins available for staking.
The best cryptos to stake
Since the crypto market changes daily, it's quite difficult to recommend a particular coin for staking. You'll have to do your own research anyway. One resource to help you make your choice is www.stakingrewards.com, which tracks over 200 coins available for staking. Remember that when choosing a cryptocurrency for staking, you need to carefully evaluate the coin through fundamental and technical analysis. Another thing to consider is that it makes sense to invest in staking coins that you're going to invest in anyway.
We'll list some of the options currently considered by many to be the best crypto staking coins.
Ripple is not available for staking.
Polkadot is a blockchain interconnection protocol that allows arbitrary data to be transferred between blockchains, not just crypto assets. The coin's blockchain is based on the Nominated Proof-of-Stake (NPoS) consensus algorithm and ranks among the Top 10 cryptocurrencies by market capitalisation. The estimated annual staking reward is 13.13% at the time of writing.