Staking is the act of delegating cryptocurrency to earn rewards, similar to earning interest on a savings account in a bank. This reward incentive is used to help run blockchain networks that use the proof-of-stake consensus.
In a proof-of-stake (PoS) system, coins are locked up and used to validate transactions on the network. It’s similar to mining (for coins like Bitcoin) but uses far fewer resources and energy.
In a proof-of-work system like Bitcoin, miners compete to solve the same puzzle. Only the first one to solve it can validate the transactions and, in turn, receive a reward.
How Does Staking Work?
With staking, the system randomly chooses a miner to validate the next transaction based on how many coins they have staked. For example, if there are 100 coins in circulation, and a miner stakes 10 coins, they would have a 10% chance to be chosen to mine the next block – and thus receive the reward.
All participating stakers receive a portion of the cryptocurrency they have staked. This reward adjusts based on factors such as how long they have been staking and how many coins are on the network. The annual yields for these coins can range anywhere from roughly 4-10%.
Each network has minimum technical and financial requirements to be a staker. For example, on the Ethereum 2.0 network, there is a minimum requirement of 32 ETH to be a staker.
Rewards and Risks of Staking
Just like any form of investing, staking also comes with an array of rewards and risks to the user. Here are some of the most prevalent:
Staking Rewards
- Earn extra tokens: People who have been in the game for the long haul look at staking as a way of making their assets work; they utilise their assets to generate rewards and earn extra tokens, instead of sitting untouched in a wallet.
- Earn the right to vote: Miners may be given Governance Tokens, which allows them to gain voting rights and have a say in future protocol changes.
- Use fewer resources: Unlike crypto mining, you don’t need any equipment and it’s a far more environmentally friendly method.
Staking Risks
- Volatile in nature: Crypto prices are volatile and can drop quite fast. Price swings are very common so volatility should be expected.
- Fees: When staking through an exchange, there are generally associated fees; these fees are typically a percentage of the reward.
- Lock-up periods: Staking requires coins to be locked up for a minimum time frame. During that time, you’re unable to do anything, like selling, with the staked assets. The same applies when it comes to unstaking assets – there may be an associated unstaking period.
Staking Through an Exchange
Instead of going through the technical and sometimes confusing process of staking tokens yourself, many exchanges offer to facilitate that process for you. You can simply specify the amount and time duration you want to stake and the return amount will be displayed for you.
This method is very hands-off and requires very little effort from the user, which may be beneficial for those just getting started.
Coins You Can Stake
While not all coins are available when it comes to staking, there’s a large market for those that do. Some coins available for staking include Cardano (ADA), Solana (SOL), USD Coin (USDC), Polkadot (DOT), Algorand (ALGO) and Ethereum 2.0 (ETH2).
Staking is a way of earning rewards for holding particular cryptocurrencies; allowing investors to earn a percentage-rate reward over time. Serious investors stake currencies to get involved in the governance and validation side of networks.
