What Is Staking and How Does It Work?

If you want to find out how to make money staking crypto, this is the place to be — our team of experienced crypto enthusiasts has created a guide in which we’ll explain what staking is, how it works, and how to stake crypto.

Furthermore, you’ll find out what Proof-of-Stake is and which cryptocurrencies are available for staking. We’ll end the guide by listing the main advantages and disadvantages of staking crypto.

What Does Staking Crypto Mean?

What does staking crypto mean? Staking is the process of holding cryptocurrencies as a stake in exchange for a reward. The goal of staking is to contribute to the creation of new blocks and the security of the blockchain network.

For their contribution, stakers receive rewards that are paid out in the digital currency used for staking. Staking is used in Proof-of-Stake blockchain networks, and it enables passive income earning.

How Does Staking Work?

Staking works by keeping a certain amount of digital tokens locked in the user’s wallet for a predetermined time. The staking period can take 30, 60, 90, or 365 days.

The blockchain network uses these locked cryptocurrencies to create new blocks in the network. Then it selects validators who will be responsible for confirming transactions. A larger number of locked cryptocurrencies increases the user’s chances of becoming a validator.

With each addition of a new block, new tokens are produced and allocated to validators in the form of staking rewards. Crypto staking platforms use a PoS consensus to make sure that the selection of validators is fair.

To qualify as validators, users will also have to make a minimum deposit that will depend on the cryptocurrency they use. For example, the minimum deposit for staking Ethereum is 32 ETH.

Staking can be direct or indirect. The former refers to direct participation in network validations. The latter implicates using a third party. 

Indirect staking can also be divided into custodial and non-custodial staking. Custodial staking allows the node operators to receive a reward even if they are not validators, while in non-custodial staking, staked tokens belong to delegators.

How to Stake Crypto?

You can start staking tokens through a crypto exchange, a staking pool, or by creating an account on SaaS platforms.

Staking Through a Crypto Exchange

Choose a centralized crypto exchange that has a built-in staking feature, such as Binance, Kraken, and Coinbase. Once you have selected the best crypto exchange for you, create an account and link it to your crypto wallet.

Buy a cryptocurrency that can be staked, go to the staking page, and enter the amount you would like to stake. Some crypto exchanges will have minimum deposit requirements.

Staking Pools

Staking pools are networks in which stakers collectively lock their coins in fund pools. In this way, they jointly contribute to creating new blocks and generating rewards. The bigger the pool, the bigger the stake rewards. These pools usually charge fees that vary from 5% to 10%.

To stake crypto via staking pools, users must first transfer the desired digital currency to their wallet. After that, they have to choose a staking pool to which to send their cryptocurrencies.

Staking-as-a-Service Platforms

SaaS platforms are intermediaries between cryptocurrency owners and blockchain consensus. These platforms allow users to stake their tokens and gain rewards through network fees.

To stake crypto via SaaS platforms, users must create an account and connect it with their wallet. After that, they must enter the desired amount and tap the “Stake” button to confirm their choice. 

What Is Proof of Stake?

Proof of Stake or PoS is a mechanism used to maintain the functionality, integrity, and security of the blockchain network. It was created as an alternative to the Proof-of-Work mechanism in which transactions are confirmed by validators and not miners. PoS is also a consensus that validates transactions and creates new blocks.

This model was also developed to provide better rewards and stricter penalties for those who try to cheat the system.

After cryptocurrency owners create validator nodes, PoS will select one node to validate block transactions. If the transactions are valid, the block will be added to the network, and the user will be rewarded. On the other hand, if the validator presents incorrect information, they will be penalized by losing part of their staked holdings.

What Are the Benefits of Staking Crypto?

Now that we have crypto staking explained, here are the main benefits it brings.

Earning Passive Income

You can earn passive income by keeping your cryptocurrencies locked in the blockchain network. This is especially useful for investors who believe that the value of a particular token will increase in the future.

Keeping the Blockchain More Secure

Staking secures the blockchain network in several ways. First, stakers contribute to decentralization. Secondly, staking can prevent Sybil attacks since it requires minimum deposits. And finally, staking protocols punish users who act maliciously.

Contributing to Sustainability

Staking has become an alternative to mining as it reduces energy consumption. Staking doesn’t require specialized hardware, which makes it more eco-friendly.

Increased Coin Value

Staking may cause a decrease in the supply of a particular token. This will lead to its scarcity, which will ultimately increase its value.

What Are the Risks of Staking Crypto?

Here are the main disadvantages of crypto staking.

Loss of Invested Money 

Staking can lead to a potential loss of invested money, as cryptocurrencies are subject to frequent price changes. This means that staking is suitable only for those who are interested in long-term investments.

Inability of Usage

Since your tokens will be locked on the blockchain network for a certain period, you won’t be able to use or sell them. Even if you want to unstake them, you’ll have to wait for at least a week.

Risk of Hacking

If there’s an attack on the network, stakers will lose all their funds. That’s why it’s vital to create accounts only on platforms that use strict security measures. The network may also run into a programming error, which can cause a temporary interruption of the network.

What Cryptocurrencies Can You Stake?

You won’t be able to stake all cryptocurrencies, but only those that use the PoS consensus. Currently, around 140 digital currencies use the PoS consensus. The most popular include:

• Ethereum (ETH)
• Binance Coin (BNB)
• Cardano (ADA)
• Avalanche (AVAX)
• Polkadot (DOT)

That said, Bitcoin staking is not possible since this cryptocurrency uses the PoW consensus, which doesn’t allow staking. Apart from BTC, you won’t be able to stake around 160 other cryptocurrencies, such as:

• Dogecoin (DOGE)
• Litecoin (LTC)
• Bitcoin Cash (BCH)
• Monero (XMR)
• Dash (DASH)

Conclusion

Crypto staking is a popular trend that will continue to develop. Why? Since it offers a simpler and cheaper option for earning passive income than mining. This will lead to an increase in the number of digital currencies that will transit from the PoW to the PoS consensus.

Furthermore, staking can bring a lot of benefits to those who are interested in long-term investments. However, staking also comes with certain risks, such as losing the token due to hacks or a drop in value.

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