You may wonder, “what does staking a coin mean?” You’re probably not the only one who has asked that question. The truth is, crypto staking is an innovative concept, as it has direct application to the availability of cryptocurrency.
One reason it’s a widely accepted blockchain trend is that it allows users to earn more and take better advantage of the volatile prices of cryptocurrencies.
However, the major concern people raise is the energy cost of staking and what type of staking is less energy-consuming. In this article, we’ll address all these questions and teach you everything you need to know about staking cryptocurrency. Let’s ride!
Table of Contents
- What is Crypto Staking
- What is Proof-of-Work (PoW)?
- What is Proof-of-Stake (PoS)?
- Methods of Crypto Staking
- How to Become a Validator
- What to Consider before You Stake Cryptocurrencies
- How to Stake Crypto in 5 Easy Steps
- How to Stake Crypto in an Exchange
- Most Popular Cryptos For Staking?
- Pros and Cons of Crypto Staking
What is Crypto Staking
Crypto staking or staking coins means putting your crypto holdings away for a while. The concept is to earn interest or some other rewards. Look at it as holding your money in the bank.
While you put money away in your savings account, the bank uses it for other purposes. These include lending and other investments. At the end of every month, you get a percentage of whatever the bank earns off your money in the form of interest.
Staking coins is the cryptocurrency version of earning interests from the bank. The mechanism is straightforward. You leave your cryptocurrency in your wallet. Then, the holding platform uses it to forge new blocks on the blockchain system.
It is a way of participating in the transaction validation system on blockchain. You can also see it as every other investment opportunity. The more crypto you stake, the greater the rewards you will receive.
An investor with the least balance of crypto on the blockchain can help the system. “Help” here involves confirming transactions and earning staking rewards in the process. You can also liken a coin staking to a security deposit.
Many times, the creation of a new block is a huge success. The network rewards you for allowing them to use your holdings as validators in this process. It is a lot less resource-intensive than mining.
All you have to do is lock your cryptocurrency away or hold it on an exchange system and gain from it. Yet, you cannot grasp what staking coins entail without first understanding the meaning of Proof-of-Work and Proof-of-Stake. Let’s take a look at them one after the other.
What is Proof-of-Work (PoW)?
Proof-of-Work is a mechanism used in the cryptocurrency industry to confirm transactions and mine new tokens. It helps you to conduct peer-to-peer cryptocurrency transactions while eliminating the need for third parties.
Proof-of-Work has a sole purpose. It prevents users of crypto platforms from double-spending. It also discourages the printing of extra coins that the users did not earn.
The system cannot allow users to spend coins more than once. It will make the particular cryptocurrency unpredictable. The result is that it will lose its value as a result of the inflation of supply.
As a matter of fact, double-spending is a serious issue in online transactions. The reason is that digital transactions are easy to copy. So, Proof-of-Work makes it difficult to double digital money.
You will have to show proof that you have done the required amount of computation before carrying it out. It is a way of reducing the abuse of the service by preventing users from spamming the network and manipulating data.
What is Proof-of-Stake (PoS)?
Proof-of-Stake allows you to mine or confirm block transactions depending on how many coins you hold. This means that the more coins a miner owns, the greater mining power the miner has.
So, if you stake 4% in total coins, you can only confirm 4% of the new blocks generated on the platform. The Proof-of-Stake mechanism brought changes to the cryptocurrency system. It replaced the term ‘mining’ with ‘validation.’
In this system, the ability to validate transactions is no longer on computing power. Financial power now has a greater role to play. As a validator, you do not need a high-performing computer system or a great amount of power to run the system. In the end, this saves cost and prevents attacks.
Types of PoS
Proof-of-Stake has different variations, and some of them are:
#1. Proof-of-Stake (PoS)
This is the regular Proof-of-Stake as you know it, and it uses standard blockchain technology. It doesn’t use computing power to determine the next block; rather, it uses a random selection of various combinations.
#2. Delegated Proof-of-Stake (DPoS)
The delegated Proof-of-Stake is an advanced version of the Proof-of-Stake. It uses an election system that allows you to take part in the minting process. You join by voting and selecting delegates to validate the next block.
These delegates are witnesses or block producers. To vote for a delegate, you have to pool your tokens into a staking pool and link them to a specific delegate.
You do not have to move your tokens to another wallet to do this. A staking service provider helps with staking your tokens in the staking pool.
The number of chosen delegates is often between 20 to 100 for each new block. As a result, the delegates of one block may not be the delegates of the next ones.
These elected delegates receive the transaction fees that come from the validated block. The only condition is if they verify all the transactions in that block.
All rewards are then shared among the users that pooled their tokens in the staking pool of the successful delegate.
The higher your stake, the higher rewards, as the sharing formula depends on each user’s stake. So, if you stake 9% of the total staking figure, you get 9% of the block reward in return.
If the delegate does not verify all transactions within the given time, they miss the block. Such an action leaves all transactions unverified. No reward comes out of it as a result.
#3. Leased Proof-of-Stake (LPoS)
The leased Proof-of-Stake system is an advanced form of Proof-of-Stake. It allows you to lease your token on the Waves platform and gain a percentage of the payout as a reward.
Under this system, you get to take part in the generating process of new blocks. The larger the amount leased to a node, the higher chances of the node getting chosen to generate the next block.
If the node you leased to gets selected, you get a reward as a leaser. You must choose the right node operator with quality and well-connected nodes.
You can also stop leasing at any time when you place a canceled lease transaction. There is a minimum balance required on the Waves platform to operate a note.
That minimum balance is 1000 WAVES. The fact that the system allows small users to lease tokens to larger nodes and get rewards is a plus. It serves as an incentive for more people to join this system.
Methods of Crypto Staking
As long as you have the funds available, there are so many ways to stake your coins. Some of them are:
#1. Solo Staking
Having and running your validator node is one way you could stake cryptos conveniently. The reason is that you are both the staker and the validator.
Also, you do not have to share the staking rewards when they come in, and if another staker delegates their assets to you, you get the validator fees.
To start a solo staking and run your validator node, you need the required skills and resources. Various blockchain platforms have different standards that you must meet before getting approved to be a validator.
#2. Third-Party Staking
Third-party staking involves using a validator company. These companies provide staking services on various Proof-of-Stake platforms.
These companies are also specialized in staking. So, they have qualified hands and the right devices to get it done. All you have to do is provide the funds for a valid node.
The third-party company will, in turn, handle the node as the validator. You also have to pay the company a fee for this service. Before engaging any company, do your own due diligence.
#3. Crypto Exchange Staking
If you are looking for a less complicated way of staking, try an exchange. The process is easy, as it only involves depositing your crypto in an exchange platform, like Binance or Coinbase, then they handle the staking for you.
Staking the coins provides liquidity in the market and pays you interest. It is a good option for investors that do not know how to manage cryptocurrency.
Also, it helps you to invest; even when you don’t have many funds, you only have to pay an exchange fee to use this service.
Crypto exchange staking is the reason crypto exchange platforms are the biggest custodians of cryptocurrency worldwide. Nonetheless, ensure to conduct your due diligence before investing your money on any platform.
#4. Cold Staking
Another way to get involved in crypto staking is through cold staking. It involves staking through a wallet that is not connected to the internet, a cold wallet.
Cold wallets are very secure, but the only downside is that it has a slow transfer process. Many blockchain platforms prefer to use hot wallets.
Hot wallets are always online and process immediate coin transfers. Yet, because hot wallets are always connected to the internet, they are prone to hacking. So, cold staking remains a preferred option.
#5. Pool Staking
In pool staking, you combine resources with other liquidity providers to provide liquidity to the staking network. By doing so, you are contributing to the network’s staking protocol as well as increasing reward volume.
In pool staking, although interests rates may increase, it is calculated and distributed accordingly to the liquidity providers based on the amount of crypto-asset staked.
Pool staking is usually ideal for holders who are new to staking because it may not require many cryptocurrencies when compared to single staking protocols. For instance, in the ETH 2.0 staking protocol, the minimum cryptocurrency you hold to qualify is 32 ETH.
When it is calculated based on the current worth of $3000+, you get a minimum of $100,000 worth of ETH. However, staking networks like Dot.Finance and Crypto.com charge less compared to single staking protocols in Ethereum.
How to Become a Validator
Each blockchain platform or network has its requirements to become a validator. Below are the requirements for two of the largest Proof-of-Stake platforms. These platforms are Ethereum and Cardano.
If you want to be a validator or run a validator node with Ethereum, you must meet the following requirements:
- You need basic knowledge in storing data processing transactions.
- You must also know how to add blocks to the blockchain
- Also, you need a computer that can run on Eth1 and Eth2 nodes
- You must have a deposit of 32 ETH to activate the validator software
- Then, you must wait for approval from the platform, which may take a while
Check this page for more info.
The Cardano network originated from the co-founder of Ethereum, Charles Hoskinson. It allows users to become stake pool operators and stake pool owners. If you want to be an operator, you must meet the following requirements:
- You need the operational knowledge of how to set up, maintain, and run the node.
- You must have a 24/7 commitment to maintaining the node
- Must have system operation and server administration skills
- If you have experience in development and operations (DevOps), it is a plus point
- Your computer must have at least 8 GB of RAM and 24 GB of hard disk space.
- You must have a good network connection with about 1 GB of bandwidth per hour.
- You also need a public IP4 address
Check this page for more info.
What to Consider before You Stake Cryptocurrencies
Before you decide to stake cryptocurrencies, consider the following:
- You must decide on the method you want to use in staking your coins. These include the kind of wallet you want to use, exchange platform, and validator. Once decided, you need to investigate them. Then, determine their competence and track record.
- Consider the lock-up period. It is a time that the system prevents stakers from selling coins to preserve liquidity. A good way to cut risks is to stack without a lock-up period.
- Also, consider the fees that the validators and staking pools will charge. Bear in mind that you will pay this fee out of your staking rewards
- You must also decide if you want private keys to your wallet. Or if you want to leave your funds with a custodial service. Going with the former option is preferable.
- Then, access the liquidity of the coins you want to stake. Use coins with high trading volumes to reduce risks associated with low liquidity.
How to Stake Crypto in 5 Easy Steps
Here are five ways you can begin your crypto staking journey:
#1. Choose a Coin to Stake
Many Proof-of-Stake coins are popping up here and there. It has made it pretty challenging to decide on the top of your head.
Put time into carrying out proper research. It is an essential part of your crypto staking journey. Make sure you understand the potential risks and rewards before picking a coin to put your money in.
#2. Prepare Your Wallet
You need a software or hardware wallet to keep your staked crypto and earn rewards. Suppose you prefer to use a centralized system to manage your coins. In that case, you can forgo this step.
#3. Ensure You Meet the Requirements
Some cryptocurrency systems need you to have a standard amount of investment. Others do not mind so much. It is essential to determine this before you proceed. Then, ensure that you have the required funds to stake your preferred crypto options.
#4. Decide on the Right Hardware
If you want to stake crypto, you also need to act as a validator node. It requires that you have a strong machine connected to the internet all the time.
On average, a regular desktop computer will do, but there are electricity costs to consider. An alternative is to use cloud computing services through virtual private servers.
#5. All Set, Stake
Now, you must have chosen your desired coin. Also, we assume you have created a wallet and transferred the required coins to it.
Next, you will want to set up the right hardware and keep your device connected. Follow the staking software instructions. It will ensure that you earn passive crypto income.
How to Stake Crypto in an Exchange
If you’re using a crypto exchange, the procedure is pretty straightforward. All you need to do is to visit the staking page of the exchange.
On this page, you’ll see a list of coins for consideration. Each of them has a projected return on investment, minimum scalable quantity, and the lock-up period.
Once you’ve determined these, click on “Stake” or any equivalent button beside the coin of your choice.
Most Popular Cryptos For Staking?
Staking has increasingly grown popular in the crypto community with the surge of PoS consensus in many exchanges and exclusive staking platforms. Here is a comprehensive list of the most popular crypto for staking based on staked value.
- Cardano (ADA)
- Solana (SOL)
- Ethereum 2.0 (ETH)
- Polkadot (DOT)
- USD Coin (USDC)
- Terra (LUNA)
- Dai (DAI)
- Binance Smart Chain (BNB)
- Algorand (ALGO)
- Avalanche (AVAX)
However, most staking platforms and DeFi protocols have governance tokens that users can use to stake on such platforms. These tokens are cross-chain and can be interconverted between BEP20 tokens and ERC-20 tokens on DeFi exchanges such as Uniswap.
Pros and Cons of Crypto Staking
Below are some of the pros and cons associated with staking.
- Staking coins is a good source of passive income
- The process is quite easy and does not need you to have a supercomputer, unlike in Proof-of-Work.
- Staking pool operators charge extra fees, which take money out of your pocket.
- You may lose all your coins if the exchange platform faces an attack
- The lock-in period is a disadvantage as you cannot withdraw your coins even when there is a loss
- You have to share stake rewards with validators
The Proof-of-Stake mechanism is a major competitor to the Proof-of-Work system. It is easy to operate, efficient, and allows you to earn money while you sleep.
Still, you must take precautionary measures because crypto is very volatile. This guide contains steps to guide you through the process and help you make the right decision.
Frequently Asked Questions
Many cryptocurrency exchange platforms run validators. They allow customers to stake crypto through their exchange user interface.
Some of the best options are Binance and Coinbase. I have linked my reviews of these platforms to help you to make an informed decision.
Staking cryptocurrency is a very smart way of earning passive income right now. So, the answer to this question is yes!
Imagine getting anything from 1% to as high as 50% rewards from doing nothing. You only have to keep your wallet open. That sounds like a win to us.