Understanding Crypto Staking and Earning Passive Income

Exploring the Basics of Staking in Crypto with PoS Mechanism

Aside from selling one’s investment to make a profit when the market prices increase, there are also other ways to make money in crypto, like staking. Through staking, one can put their digital assets to work and earn passive income without even selling them.

Also, though not all cryptocurrencies may allow it, the ones that do may prove to be a good investment opportunity. 

What is staking in crypto 

A process in which one’s cryptocurrencies are staked on a blockchain, confirm transactions and earn block rewards is called crypto staking.  

Here, one can stake their crypto on blockchains that run on the Proof-of-Stake (PoS) consensus mechanism and also get the chance to earn newly minted crypto coins as rewards. 

Another thing to note is that each PoS blockchain network has a specific staking currency that is used to participate in the staking process. This staking currency is usually the native currency of the blockchain network. 

Let’s take for example, if a PoS blockchain is built on Ethereum, the staking currency would be ether. Likewise, if a new PoS blockchain network is launched, it may introduce a new cryptocurrency as the staking currency for that network. In order to participate in that network users will need to acquire the specific staking currency. 

How to stake crypto

Do keep in mind that you cannot stake all crypto coins. This is because some of them have blockchains that do not work on the Proof-of-Stake consensus mechanism. 

Now, keeping that in mind, before you start staking, you must first decide whether you want to stake on your chosen cryptocurrency blockchain or through an exchange platform. 

This is important as opting for an exchange program will lead to your investments staked by that very platform and reaping a huge staking amount. This will increase the user’s chances of getting more block rewards.  

On Ethereum, there are options to stake solo, staking as a service, and also pooled staking. Though the last option takes a percentage of the user’s rewards as service fees, it is also the method with the least risk. 

But then again, perhaps the method of staking with the least of hassle is via an exchange platform. Some famous examples are- Binance, Coinbase and Kraken. 

To make it easier for you to understand how crypto is staked, let’s take the example of Coinbase. To stake in this platform, the following steps are applied-

• First download the Coinbase wallet.

• Then choose a username.

• After that, store your recovery phrase by building multiple copies of it.

• Following that, purchase Ether and transfer it to your wallet.

• Then finally, go to the Trade tab and buy an Ethereum Stake. 

Some things to keep in mind

You will need to have enough Ether in your wallet as there will be a transaction fee for all transactions. 

If you lose your recovery phase you will not be able to withdraw your assets from your wallet. Therefore, do keep some copies of your recovery phrase safely stored in various locations.

Benefits of Staking Crypto

• Users can experience an increase in liquidity as staking allows users to put their idle holdings to work without having to sell them.

• It helps secure the network by encouraging validators to act in the network’s best interest. It also confiscates the stakes of validators that act maliciously or violate the rules of the network.

• As it requires less computing power to validate transactions and create new blocks, it is considered to be a more energy-efficient and environmentally friendly alternative to PoW mining. 

Risks of Staking Crypto

• Since the value of cryptocurrencies may vary according to the market, there is a risk of a rapid decrease in the value of the staked cryptocurrency resulting in significant losses.

• In PoS, validators can be penalized for reasons such as going offline for extended periods. This sometimes results in the loss of some or even all of the staked coins.

• As staking requires users to keep their coins locked in a wallet or validator node for long periods, there is a high risk of the loss of staked coins due to technical failures, such as software bugs and more.

Conclusion

Though considered a safe alternative to crypto trading, crypto staking is not without its risks. However, it does open up more paths for anyone seeking to participate in the maintenance and governance of blockchains. 

Also, staking is a good option for investors interested in generating yields on their long-term investments. However, if you find the need to get your money back in the short term before the staking period ends, you should avoid locking it up for staking.

Also Read : Key Differences Between Bitcoin and Wrapped Bitcoin