November 15, 2021

What is Staking in Crypto

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Eager to earn interest on your crypto? Staking may be the perfect strategy for you. But what is staking in crypto? Keep reading to find out.

Buying and selling crypto isn't the only way to make a profit.

In fact, staking is one strategy that can even generate a passive income. You simply deposit coins for a fixed period of time to earn interest.

But how does it work? Who can do it? Find the answers to all those questions and more in this breakdown of staking.

What is Staking in Crypto?

Staking is a way of earning interest on your cryptocurrency by depositing it for a fixed period of time. Staking works in a similar way to interest accounts with traditional banks.

Traditional banks pay interest because the bank uses your funds for things like loans and other investments. In staking, your cryptocurrency is put to use as well.

The term staking refers to the Proof of Stake or "PoS" protocol, in which deposited coins are used to verify transactions on the blockchain.

Verified transactions become new blocks on the blockchain. For cryptocurrencies that support staking, proof of stake is necessary for that process.

Whoever participates in successfully creating a new block is rewarded.

Remember that one of the main features of cryptocurrency is that it is not reliant on any centralized authority, like banks or payment processors. Instead, transactions are recorded on a public ledger that anyone can view—the blockchain.

Pros and Cons of Staking Crypto

  • Earn interest on crypto
  • Faster, cheaper transactions
  • More energy efficient
  • Potential voting rights
  • May be locked into a fixed term
  • Risk of slashing penalty
  • May incur fees

How to Stake Cryptocurrency

There are two methods of staking, though one requires a lot more work than the other.

The first method involves setting up your own node and running it yourself. This requires a fair amount of knowledge and expertise in staking and the coin that you've decided to stake.

You must also meet the staking minimum, which at time of writing was 32 ETH, to become a "full validator." This can be achieved by joining a staking pool, where stakers work together to cross the minimum threshold.

The second (and easiest) method is to stake through an exchange or other crypto platform. Doing it this way is as simple as depositing your coins and agreeing to stake them.

Popular exchanges, like those listed below, offer staking options:

  • Binance: Stake ETH2 or try DeFi staking (higher APYs with higher risk)
  • Coinbase: Earn up to 5% with ETH2, Tezos, Cosmos, and more
  • Kraken: Off-chain and On-chain staking will earn you as much as 12% (depending on the coin)

Crypto savings accounts offer another way to earn returns on your crypto holdings. Check out our guide to the best crypto savings accounts to start earning.

What are the benefits of staking crypto?

There are several significant benefits of staking crypto. Review the points below to see if it's worth it for you.

  • The staker can earn interest on their cryptocurrency, and potentially increase the value of their coins by limiting the circulating supply.

  • It provides potentially faster, cheaper transactions than mining.

  • Staking is also more energy efficient, generating less CO2 and electronic waste.

  • Plus, if you're invested in the future of any given cryptocurrency, staking may give you voting rights in the same way that owning stocks gives you a say in the company's direction.

What are the risks of staking crypto?

Like most investments, staking crypto isn't without risk.

  • One of the biggest risks comes from crypto's inherent volatility. While many people have made money off price fluctuations, staking may lock you into a fixed term that prevents you from selling your coins when you want to.

    If the price drops suddenly, there's likely nothing you can do to prevent a loss.

  • For those staking on their own, there is a risk of slashing. This is a penalty from stakers who are deemed to be performing poorly, or worse, dishonestly, taken as a percentage of their funds.

    Slashing penalties can result from making honest mistakes, so be careful.

  • Staking can also incur fees, especially for those using an exchange to do it.

    Seeking out lower fees is an excellent reason to shop around between exchanges before you choose a staking platform.

How is Staking Different from Mining?

Staking and mining are both "consensus mechanisms." They are used to confirm that transactions are legitimate and that nobody is, for example, trying to spend the same coins more than once. This confirmation is available to

What is mining?
Mining functions under a Proof of Work protocol, where miners compete to solve cryptographic puzzles.

The one who completes it the fastest wins the right to verify the newest block of transactions on the blockchain, as well as a small reward in the cryptocurrency they're mining.

However, mining uses a lot of computing power and a lot of energy. A lot. According to a report by Digiconomist published in September 2021, the energy consumed in a single Bitcoin transaction is equivalent to that used by an average U.S. household over 61.47 days.[1]

What is staking?
Staking, on the other hand, is far more efficient. It also comes with the benefit of potentially increasing transaction speed and lowering fees.

Proof of stake doesn't require stakers to solve problems; it just requires them to deposit their coins.

There are some experts who believe that crypto staking will ultimately make mining obsolete.

Mining started off as an option for users to earn Bitcoin at home, when Bitcoin was worth a whole lot less.

With more widespread adoption, the bar for mining has gotten a whole lot higher. Staking is still accessible to the average crypto investor.

Note: Not all coins are capable of staking. Bitcoin isn't. Ethereum (ETH2), Tezos, and Cosmos are ones that are, and there are many more as well (more on that below).

What Coins Can You Stake?

Not every crypto coin is capable of being staked, but plenty are. Here are some of the cryptocurrencies it's possible to stake:

  • Ethereum - Started out as a proof-of-work cryptocurrency and switched to proof-of-stake later on
  • Cardano
  • Solana
  • Polkadot
  • Tezos
  • Cosmos
  • Algorand
  • Dai
  • USD Coin
  • Kusama
  • Flow
  • Kava

And many more. If you're staking through an exchange, remember that not all of them support the same coins or offer the same rates. It is definitely worth your time to shop around.

Bottom Line

The staking process has a lot to offer for both those involved in the world of crypto and those outside of it.

Stakers can earn interest on their cryptocurrency holdings, potentially increase the value of their coins, and contribute to a healthy crypto community.

They may enjoy faster transaction times relative to those offered by Proof of Work cryptocurrencies. For those who choose to stake on their own, the cost of setting up and running a staking node is far less than what you would need to spend on a Bitcoin mining rig.

Staking is also better for the environment. It reduces carbon emissions, energy usage, and electronic waste. Considering the current carbon footprint of Bitcoin is comparable to that of the entire country of Oman, that seems like a pretty big deal.

In other words, staking is profitable, efficient, and good for the environment. Sounds good, right? All that's left is to get started.

References

Write to Jeremy H at jeremy.harshman@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

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Coinbase

Earn $5 in bitcoin for getting started on Coinbase

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