What Is Staking In Cryptocurrency? How To Make Money By Staking?
Until recently all that was doable with your cryptocurrencies was: you could buy them, hold them for some time, and then when the value of the crypto rose, you sold them at higher prices, earning you profits.
But with the introduction of the new proof of stake model, users are allowed to stake their cryptos. It helps in earning extra income as well as the process is much more resourceful.
But what is proof of stake and what is staking?
So first let’s look at what is staking!
What we are going to learn?
What Is Staking In Cryptocurrency?
Okay, let’s try and understand this by a simple analogy.
So you deposit some money in a bank, say as a fixed deposit for a fixed period of time. Now after this period is over your amount matures and you get back the principal amount. With that, you also receive the interest calculated annually on that amount transferred to your account by the bank. This interest is a certain percentage of the money, as decided by the central banking system or in our case the RBI since as you know fiat currency is a centralized currency. Its control and regulation are in the hands of one central body.
So how does this process work? See when you deposit some money you cannot touch that money till it matures. In that meantime, the bank uses your money to give out loans and perform other banking activities, in the process earning more money. And after the particular period, the bank returns your money and pays the interest that it had earned in its profit from other activities. The banks use your money to earn more money!
In Cryptocurrency terms, the process of depositing savings in the bank can be referred to as staking a certain amount. Though the principle of working in both cases is a bit different.
Let me explain how!
Just like you deposit a principal amount in the bank, similarly, you can stake a certain amount of cryptocurrency in a particular exchange for a particular time. Depending on the amount you stake, the exchange gives you interest returns at specific rates. These interest returns are called staking rewards.
Now there is the complex part of cryptocurrency staking done by validators and the simpler one which is for all.
Let’s look at both.
First, we will talk about the staking that is simple for all. And that is the staking that adheres to the definition given above.
Normal Staking: Staking in Centralised Exchanges
This kind of staking involves you staking some crypto in some centralized exchanges.
How To Stake Your Crypto on Centralised Exchanges?
First things first, the crypto exchanges in India like WazirX or CoinSwitchKuber, etc do not support staking cryptos, yet. So you have to go to other exchanges like Binance for staking your crypto.
So before staking any coin, first you must buy them. You can only stake the coins that are there in your digital wallet. If you are holding a coin for a long term see if it has to stake feature (which actually means see if the coin has proof of stake blockchain) and if yes, you can stake it. The increased time during which the exchange holds your coins they return extra interest.
- Like in the banks, here you know the rates at which you will get your staking returns. They can be staked for 30 days, 60 days, 90 days, or even 120 days.
- This is a fairly transparent process and while staking you will have all the information regarding the stake: redemption date, estimated interest, etc.
- The staked amount along with the interest will automatically enter your account after the completion of the redemption date.
- You can also stake more than one coin at the same time.
- Another incentive to staking is that in addition to the staking interest, you can also receive the appreciated value of the coin that you have invested.
- Not all coins can be staked; you can stake the coins that have the feature of staking.
- Once you have staked an amount you cannot touch it before the redemption date. if you do try to gain access to that staked amount then you would lose the interest returns.
- Also, these centralized exchanges that are actually staking the Tokens on the users’ behalf might charge a certain commission in exchange for their staking services.
Is Staking Crypto Worth It?
Staking is a form of passive income. That means it does not require any daily effort on your part to generate income once you have staked a certain amount. It will be as per Market wishes.
And this is how you earn money by staking.
Where Can You Stake Your Cryptocurrencies?
Many exchanges allow the staking of your crypto coins. Some of the best staking platforms in 2022 are Binance, AQRU, eToro, Crypto.com, etc.
Which Cryptocurrency Can You Stake?
The cryptocurrency that is connected to the proof of stake blockchains, only those can be staked. Presently Solana and Cardano are the most staked coins.
Proof Of Work Vs Proof Of Stake
So we have been talking long about proof of stake. What there are we will see now.
This kind of staking is mostly done by miners who can and will solve blockchain problems to create the next block in the chain. And in return, they earn staking rewards.
But to understand proof of stake we must understand proof of work and its challenges.
Okay, so again let’s understand both of these by a simple analogy.
Say in a flat race of 100m there are six participants. Now among them only a few have experience, or stronger limbs, are trained, or some just have raw talents. But whatever it is, only one person wins the race. And only that person receives the reward and the others return empty-handed. The remaining five participants’ time, energy, and effort all go to waste fruitlessly.
Something like this happens in the proof of work validation system in the blockchains. So, while trading cryptocurrency each transaction gets logged into the blockchain. How so? Only when the transactions are validated. Multiple transactions together form blocks of the blockchain. How Does it happen?
This is done by several people sitting behind numerous supercomputers all around the world. So, a single transaction generates a complex mathematical computer-coded problem. People all around that blockchain begin to attempt to solve the problem. It’s like a race. And only one person who solves it the fastest is considered to be the winner. And it is only the winner who receives some crypto as a reward (this process is known as mining, as happens in the case of Bitcoin), and sometimes they might also get the trading fees paid by users of crypto exchanges.
But this process is a bit haphazard and leads to wastage of electricity and time with respect to the cryptocurrency field. To decrease such wastage, the proof of stake method came in!
Now the proof of stake model is when only one miner is chosen at a time to verify a transaction. In this case, the miner is held completely responsible. This happens because unlike the proof of work model, here the miner has to stake an amount of crypto as collateral. This is called staking. If the miner successfully solves the problem their collateral is safe and they shall receive additional rewards as well. But if they fail to Crack the code then as a sort of penalty they lose their collateral too.
The problem with the proof of work is that many big mining companies might compete with each other to solve the problem. This is unfair to small miners who might not have access to cutting tech. This might also lead to fraudulent transactions. It is a threat to the decentralized nature of crypto.
Proof of stakes addresses these threats by allowing a single person to solve a problem at a time. The single person solves and the others double-check the calculation. The selection of the validators is based on who has staked the largest amount (since that person had more to lose); sometimes the selection is also based on the time the coins are staked for (the more time a person has staked it means they have a high number of right solutions and thus the coins are still staked as collateral). There is also a random element in there that picks out random validates. All this keeps the crypto decentralized.
But there are a couple of inconveniences associated with such staking in cryptocurrency.
Disadvantages of Proof of Stake
Firstly the crypto world is undergoing an evolution. This change is characterized by changing the proof of work model of blockchains into a proof of stake model which very recently Ethereum was doing. So this process and concept are both novel in the field and no one really knows how it is going to fare. Polkadot and The graph are other renowned blockchains using the proof of stake model.
Also, the entry barriers in such staking models are very tight. The minimum staking amount and the rates of rewards all vary from coin to coin. So your potential investment is never really fully-informed.
Yes, you can earn coins from staking. But since the value of the coin appreciates or depreciates as per Market value you should only stake coins that seem stable and have more probability of appreciated value.
Advantages of Proof of Stake
After all the unappealing stuff about proof of stake and uses of staking for miners let’s talk about better stuff.
This kind of staking cryptos directly affects the demand-supply chain and thus sometimes it is responsible for increasing the value of the coins.
Plus we also know how this model can potentially save time, energy, and electricity. It is more resourceful that way.
How Can You Make Money By Staking Cryptocurrencies?
It is quite simple actually. There are a few ways to earn money by staking.
First is the normal staking where you lock your coins in a specific exchange platform. Here you just choose a coin, get it in a wallet, and from there put it up on the blockchain as “staked”. Against the exchange will give you interest returns for the time you allow the exchange to hold your coins. The more the days you stake, the more interest returns annually.
Secondly, become the validator. This requires you to have a proper staking infrastructure including complex and often expensive computing systems. And this process will also not be passive income since you have to work diligently to solve the problems on the blockchain that come across you. But if you are good at it you do then you are entitled to greater staking rewards, that is, newly minted coins. And sometimes you can also earn the trading fees paid by the user.
Another way is by joining a pool. This means neither do to avail an exchange nor are you a validator yourself, but you connect with one’s pool. This requires you to know how you can connect your tokens to the validators pool. You can research validators on the official website of proof of stake blockchains. These places show validators’ transaction history, penalizations (if there are any), and also the commissions and fees to be paid to them. Choosing accordingly you can join a particular pool and stake. Some projects like Stakefish provide data to ensure the legality of these validators.
These staking pools are similar to mining pools in employing a capable team of engineers. But while the mining pool is for miners, the staking pools are designed to cater to the needs of the people who hold proof to stake coins.
Latest Updates On Staking
Proof of stake as a model is growing in popularity. As we know it is environmentally and community conscious because it attempts to save time and energy and huge amounts of electricity. To incentivize more proof of stake blockchain only recently did we see Mozilla announce that it would accept only proof of stake donations.
Also, Ethereum is all set to switch to proof of stake blockchain completely. As reported by Cointelegraph hereon Ethereum miners will have to mine different crypto or move to stake if they wish to be on the network.
Top 5 Platforms to Stake Crypto
Cryptocurrency is a volatile asset. Investing in cryptocurrencies requires diligent research and smart well-informed analysis. You cannot enter the crypto market blindly only trusting online resources. That said, we are not financial advisors and nothing we say here should be used as advice. These are all our personal opinions that we have gathered from various sources.
In conclusion, we would like to remind you that staking in itself is not without risks. Because the value of the tokens drops then of course you might end up with huge losses. But again, crypto is all about speculations and taking up risks.
So if you intend to be a validator and stake collateral ensure you have the right equipment to solve the problems or else in no time you would feel that you have bitten off more than you can even think about chewing!
And if you are to stake your coins on centralized exchanges ensure you are ready for a potential backlash like depreciating coin value that might ultimately result in your losses.
So crypto staking is a dynamic platform. Tread with caution and you will sail through, and if your financial bases are not secure enough, tarry a little, my friend!