Crypto Staking

Updated on April 4, 2024
Article byAswathi Jayachandran
Edited byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Crypto Staking?

Crypto Staking is a method where investors earn rewards for validating transactions with their existing holdings. The coins opted for staking will have to be kept in a lock-in period, and investors cannot trade during this staking period. The validated blocks are added to the network using the proof of stake (PoS) technique.

Crypto Staking Meaning

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Staking enables investors to use their digital assets to generate passive income without selling them. Setting aside a portion or all of their cryptocurrencies helps in the development of a blockchain’s defenses and improves the network’s capacity for transaction processing. This enables them to participate in and support their preferred network’s blockchain security.

Key Takeaways

  • Crypto staking helps investors earn interest on their assets if they validate legitimate transactions using their existing holdings. The validated blocks are new additions to the blockchain.
  • Validated transactions get rewards in the form of cryptocurrency in proportion to the staked amount.
  • Only certain cryptos are suitable for staking. For example, Cardano (ADA), Tron (TRX), and Ethereum (ETH) are some of the cryptos that one can stake.
  • The advantages of staking cryptos include earning a passive income, being better for the environment, and supporting worthy projects.

Crypto Staking Explained

Crypto staking is a method of earning rewards when an investor holds on to a cryptocurrency and keeps it as a deposit for a lock-in period instead of trading. The reward is somewhat similar to getting bank account interest, except that earnings are usually cryptocurrency coins.

Cryptocurrencies use a consensus mechanism, like proof of stake (PoS), to ensure that transactions are secured and verified without needing a bank or payment processor as a middleman. It is a method that validates entries into a blockchain and secures them. When participants validate incoming transactions, they are added as new blocks to the chain. When verification and addition occur, the parties are in consensus. The participants here are validators. They stack or lock in crypto. In exchange, they get a chance to validate new transactions and record them.

The basic idea behind it is that the validators have faith in the integrity of the transaction and that they are ready to back it up with their own money. However, validators may be “slashed” if they submit inaccurate data or fraudulent transactions. Their stakes or locked-up cryptos are “burned,” which means they are transferred to an inaccessible wallet address where no one can access them, making them completely useless as a method of punishment.

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Strategy

There are no fool-proof universal strategies that are always successful. Each individual’s investing journey is different. Therefore, returns also vary according to the amount bought and the number of coins or currencies bought. Like stock markets, cryptocurrency is also volatile, and investors must partake in trading with utmost care. If the individual doesn’t want to profit by trading in the short term and does not want to keep their assets idle, they can choose to stake. At a basic level, when they stake the currencies, they earn a small percent of interest on the same type of coin staked.

In short, crypto staking can thus become an excellent income-generating activity for the participants.

Let’s take the hypothetic example of Jerry to understand passive income crypto staking. Jerry has invested in a cryptocurrency called Cardano (ADA). His first investment was 20,000 Cardano. Then, he decides to try his hand at staking to earn crypto staking passive income. To test the waters, he decided to stake 10,000 Cardano at an APY of 2.5% (the highest apy crypto staking available then) for one year. At this rate, he will receive 250 ADA’s earned in total. A crypto staking calculator can be helpful to find Jerry’s rewards quickly.

When To Crypto Stake?

Investors can opt for staking, especially if there is a bear market and they cannot sell at a good price. Those who want to earn a passive income can also opt for this. Here, a person can accumulate currencies instead of cash, which they can sell at a profit later. When investors feel they are getting a good deal from certain projects, they can stake it away for the future while waiting for the asset to reach its peak price. As always, traders must plan out their investments to balance the portfolios. Staking can reduce some of the loss associated with cryptos by preventing impulsive selling.

Examples

Check out these examples to get a better idea of crypto staking:

Example #1

Coinbase, an American company that operates a cryptocurrency exchange platform, provides 2.60% APY for Cardano (ADA), Ethereum (ETH) for 3.28% APY, and Solana (SOL) for 4.00% APY. Individuals need to meet minimum requirements, such as they can only do staking with a minimum limit of currency and for a certain number of days. They will receive the reward if they keep it for that period. Otherwise, it will result in a loss of interest. The investors need to thoroughly research whatever market claims regarding the best crypto staking rewards before investing.

Example #2

Tom staked huge amounts of cryptocurrency and decided to become a validator. His job was to check if cryptocurrency transactions were legitimate, and he should not be submitting any bad data or fraudulent transactions. Unfortunately, there was a mistake, and the data did not add up, resulting in a fraudulent entry. Assuming he had staked $100000 worth of ADA at 15% APY, he will now lose all of the $10000, and his dreams of earning crypto-staking passive income face challenges.

Advantages

The following are the main advantages of crypto staking:

#1 – Passive income

If the investors do not plan on selling the cryptocurrency in the near future, there is a high chance that they can accumulate a significant number of currencies with staking. This depends on the amount they staked and the period for which they staked it. The higher and longer a person gets, the more return a person gets.

#2 – Better for the environment

Blockchains that use proof of work (PoW) require a lot of raw computational power and are energy-intensive to operate. For a chance at a reward, investors need this power to solve challenging mathematical puzzles. One can avoid the problems with PoW consensus technique through staking.

#3 – Supporting worthy projects

An extra advantage of staking is that it helps the blockchain project become more effective and secure. In addition, it increases the blockchain’s ability to handle transactions and its defense against threats by staking.

Frequently Asked Questions (FAQs)

1. How to make money staking crypto?

Staking crypto can help investors make money over time when the currencies are “locked up.” There is a particular period when the currencies are stacked and cannot be used for trading. The investors normally chose this period. According to the chosen period, the return on interest varies.

2. Can you lose money staking crypto?

Yes, if the individual is validating fraudulent transactions, their asset will be burnt, wherein the asset will be sent to an unknown wallet. From then, the asset remains inaccessible. However, staking done by thorough individual research can help one avoid losses and reap the Best crypto staking rewards.

3. How does crypto staking work?

Staking acts like a guarantee the investor provides while validating the transactions. If the validated transactions are true, legitimate investors will be credited with rewards. These transactions then become a block on the blockchain.

4. What is APY in crypto staking?

APY refers to a percentage that represents the entire amount of stake rewards anticipated to be earned throughout a year, compounded at predetermined intervals over a year. A crypto staking calculator can calculate the highest apy crypto staking and make investment decisions.

This article has been a guide to What is Crypto Staking. Here, we explain crypto staking in detail, its strategy, examples, and advantages. You may also find some useful articles here –

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