What is crypto staking?deltafx writer 20 August 2021
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Usually, when people think about investing in cryptocurrencies, the first things that come into their minds are mining and buying them. But there is another method to be involved in the crypto space, which is called crypto staking. It may be something new even for those who have been in the financial markets for a while. However, if you want to invest in cryptocurrencies, you should know what it is and how it works.
By learning cryptocurrency staking, you can significantly increase your knowledge about the crypto space. It helps you go one step further than only mining or trading, and you will learn how a crypto exchange works.
What is cryptocurrency staking?
This process concerns holding your coins in an account in order to earn rewards or interest. Blockchain is the basic platform that is used to build cryptocurrencies; it enables and validates the transactions and stores the related data. There are two types of validation processes for cryptocurrencies, and they vary for different types of coins and the technology they use; they are called proof-of-stake and proof-of-work. Crypto networks need these processes to achieve consensus and confirm that all data related to transactions are added to a blockchain.
Achieving such a consensus requires some participants. Investors who hold and lock their cryptocurrencies in their digital wallets participate in the network consensus. Stakers verify and confirm different transactions on a blockchain. But they do not do it for free, and the networks reward them for staking.
This process is very similar to depositing money in an account in a bank. The owner of the account receives interest for the deposited money in the bank, and the bank uses this money for other purposes.
How does the cryptocurrency staking work?
This process is a kind of passive activity, and the active traders who like to risk everything for more profit may not like it. When an investor stakes his coins in his digital wallet, the network can use them to add new blocks on a blockchain. When an investor holds a high number of coins in a digital wallet, the chance of being picked by the network increases too.
The coins in a new block act as validators. If an investor holds the coins in a block to do this job, the network will reward the investor. The more the coins, the more the reward will be.
Different types of staking cryptocurrencies
There are numerous types of cryptocurrencies in the market lots of them have the ability to be staked. It is not logical to talk about all of them here; however, we talk about three of the most popular ones that can be staked.
Ethereum is one of the most famous cryptocurrencies, and almost everyone has heard its name. You need to buy and hold at least 32 ETH in your digital wallet for the purpose of staking. You can receive 5% to 17% profit every year, and this amount is not a fixed value.
Tezos is an open-source blockchain network, and it has a unique cryptocurrency. The symbol of this cryptocurrency is XTZ in the market. Investors can stake it on some platforms. You can receive a 6% yearly profit by staking Tezos in your digital wallet.
EOS is used in decentralized programs and based on this aspect, it is very similar to Ethereum. The investors can stake these tokens on the EOS blockchain and receive rewards. You can receive up to 3.2% profit by staking EOS in your digital wallet.
How to begin crypto staking?
First, you need to select a cryptocurrency and decide where to stake it. In the following, you can see easy steps to start staking.
- Select a cryptocurrency to stake.
- Find a reliable digital wallet in which you want to hold the cryptocurrencies. Sometimes you have to only download a digital wallet from a specific crypto’s main website.
- Some networks require you to buy a minimum number of cryptocurrencies to begin staking, like Ethereum. So, you should buy the required amount.
After these steps, there is nothing else to do. You should only sometimes check your digital wallet to see if everything is going fine.
Where to stake cryptocurrencies?
There are many digital wallets out there that you can have access to them for free. Some big exchanges, such as Coinbase, offer users their own digital wallets. Always remember that for some digital wallets, you need to specify the purpose of holding the cryptocurrencies in your account. If you want to stake, you choose the option of staking to earn profit.
You should know that different platforms and digital wallets may have different rules and offers. Before choosing a digital wallet, try to spend some time and research about them to gain the necessary information.
Pros and Cons of crypto staking
As we said earlier, staking is a kind of passive investment that may not be desirable for active traders. However, many people who don’t like to risk their money can use it. But the biggest problem about staking is the high volatility of the crypto market. Sometimes fluctuations may heavily affect the value of the cryptocurrencies and lower the overall value of your profits. Although, the opposite of this story is also possible.
Staking is a great way to use your cryptocurrencies to earn rewards. This process is very similar to holding your money in a bank account or buying some stocks to receive their returns. Usually, those investors who like long term investments and don’t have the time to trade frequently can use this strategy. If you have many cryptocurrencies and you are not going to use them soon, let them work for you to make some profit.