Staking your cryptocurrencies to earn more is one way to increase your profits. But what is staking? In this guide, we'll explain what staking is, how it works, and the potential risks you should be aware of.
Verifying Cryptocurrency Transactions: Mining and Staking
To understand staking, let's take a look at how blockchain transactions are processed. In traditional currency trading, banks and financial institutions usually work behind the scenes for this purpose. However, decentralized blockchains require the network to come together to reach a consensus on who owns what. Anyone who does this for the blockchain is essentially providing a service and can earn coins by doing so.
Most blockchains reach consensus in one of two ways:
- proof of work (PoW), which includes mining
- proof of wager (PoS), includes staking
Miners solve complex puzzles to verify transactions
and prisoner of war In blockchains like Bitcoin, miners compete to solve complex cryptographic puzzles. The first miner to solve each puzzle validates a new block of transactions on the blockchain and earns crypto rewards in the process.
Stakers use their own crypto to verify transactions
and PoS Instead of miners, blockchain has stakers. Staking is not a very intensive process. Set up (stake) your own cryptocurrencies and validate other people's cryptocurrency transactions. Anyone can do it and no expensive mining equipment is required. Multiple stakers put in cryptocurrencies at once, but it's up to luck to decide who validates the transaction and earns the crypto rewards. That being said, the chances increase if you have a larger stake.
Compared to mining, staking uses much less power and typically processes transactions faster. The rewards from staking are usually lower compared to mining because it is easier to make a profit. Staking is much less capital intensive than mining. While mining requires purchasing expensive mining equipment and electricity, staking only requires you to lock up your cryptocurrency for a period of time.
How to bet cryptocurrencies yourself
There are many blockchains where you can stake cryptocurrencies to earn rewards. Examples include Cardano, Cosmos, Avalanche, Polkadot, Tezos, and Kava.
There are two ways to stake cryptocurrencies.
- Direct staking as validator.
- Staking indirectly as part of staking pool (For example, cryptocurrency exchanges, etc.).
Direct staking as a validator
Staking directly as a validator can be lucrative, but there are some significant barriers to entry that keep it out of reach for most people. First, you typically need a large amount of crypto assets to become a validator and start staking. for example, Ethereum You need to stake at least 32 Ether (currently around $50,000) and in the case of Avalanche you need at least 2,000 AVAX (also currently around $50,000).
Second, direct staking requires sufficient technical knowledge of blockchain protocols. Let's look at Ethereum again. The Ethereum website explains how you should spend time reading the documentation and talking with the development team to learn how to use the staking software. By doing so, we will be able to better resolve any issues that arise during validation of the Ethereum network. You also need to run your staking software 24 hours a day, every day. Failure to do so may result in hefty penalties.
Staking indirectly as part of a staking pool
Staking indirectly via staking pool It’s much easier as it doesn’t have the same barriers to entry as becoming a validator. The staking requirements are much lower, the process is simple, and there is no need to have software running in the background all the time.
Staking pools are similar to mutual funds, where investors pool their resources in exchange for a proportional slice of the pie. The person or entity operating the pool (the “Pool Operator”) is effectively the validator and handles all the work.
Similar to mutual fund managers, pool operators receive fees for managing their pools. That fee can eat into your bottom line, but it's the price you pay for convenience and simplicity. All you have to do is find a suitable staking pool and deposit your stake according to the pool's terms and conditions.
Most major cryptocurrency exchanges, including platforms like Change, offer numerous blockchain staking pools. Depending on the blockchain, you can also stake your cryptocurrencies through certain apps. When joining a pool, it's usually better to be a small fish in a big sea than a big fish in a small pond. That's because the larger the pool, the more power you have as a validator and the more likely you are to earn more rewards.
What are the risks of staking?
Staking is a great way to earn passive crypto income, but there are some risks you should be aware of before jumping in.
- Staking cryptocurrencies allows you to earn rewards in volatile assets. The return may not compensate for the risk, as you can earn more coins that continue to lose value in USD.
- Slash risk: Slashes occur when a validator's machine goes down, and the validator or staking pool can lose some of their stake.
- Risks for staking pool operators: When staking using a cryptocurrency exchange or other type of platform, your cryptocurrencies are as secure as the platform running your staking pool. Therefore, it is best to ensure that you are staking on a licensed and trusted platform.
- Minimum staking period: Some staking pools require you to lock up your cryptocurrencies for a certain period of time, during which you cannot sell your stake if you wish. Therefore, always check if your staking platform has a lock-up period.
This guide was created in collaboration with Finimize. investing in change.
Disclaimer: stock* Replicate the performance of full or fractional shares in your favorite companies with derivative products from Change Securities BV.
