It does not matter whether you are a seasoned trader or a novice — if you have heard about the decentralized exchange, then you have also heard about staking and its incredible benefits. Such marvelous popularity of this theme is a small wonder considering the weight of its impact on the habitual principles of cryptocurrency trading. Therefore, what is crypto staking? Why do you need to know about it? Is it as important as they say? This concise article will highlight its most prominent features and explain the main risks associated with it.
What is Crypto Staking?
This relatively new concept presents an alternative to the main ways one could have dealt with tokens: either mining them or purchasing and selling them at various exchange platforms. Staking offers investors an opportunity to support the chosen blockchain system by lending it crypto assets, which may result in making a certain profit. In other words, you lock up your holdings in your wallet, expecting to be rewarded for doing so.
Such a process is quite similar to depositing your money using a savings account. The selected bank obtains an opportunity to use your cash, making a profit, whereas you receive a certain annual percentage as a reward for lending your cash.
Although this explanation is significantly simplified, it conveniently illustrates the main advantage of staking: ordinary users may limit their risks and earn interest by helping maintain the functionality of the chosen network.
However, instead of lending their money in the literal sense, crypto stakers play a verifying role. Modern cryptocurrency networks utilize one of the following mechanisms: proof-of-work or proof-of-stake. The former mechanism relies on miners of tokens, whereas the latter revolves around those users who run nodes of the blockchain network.
Therefore, staking is available only in those networks, which apply the proof-of-stake verification model.
What Is the Proof-Of-Stake Model?
This consensus mechanism is universally regarded as an improvement of the previous proof-of-work model. Its main advantage is the reduced number of computations, which must be performed to verify the block. Hence, it is not only much more eco-friendly in comparison with the older consensus model but also significantly faster. Relatively simple blockchains, such as Bitcoin, may perform all necessary computations without slowing down or at least without slowing down excessively. However, sophisticated blockchains, such as Ethereum, contain too many additional features. Hence, they cannot rely on mining.
In proof-of-stake systems, validators stake their crypto assets on the network. These assets become temporarily unusable. Next, the system selects validators to find the next block, whereas other validators also confirm its validity. After enough participants provide their confirmation, the block is considered valid and added to the blockchain. Those users who stake their coins receive rewards for direct participation in the confirmation process.
It should be noted that you do not lose your tokens by staking them — your coins remain in your possession; you simply “lend” them. However, even though their number remains the same, their price may change following the price movements in the market.
How to Stake Crypto: A Concise Guide
Although academic nuances of various consensus models may seem confusing, the actual practical method of staking crypto is much more accessible. Here is a brief guide that will help you with that:
1. Select a cryptocurrency, which you consider the most promising. Do not forget that you need to choose among proof-of-stake tokens, since one cannot stake coins in proof-of-work blockchains. You need to consider the potential development of the selected token, its investment potential, minimum staking requirements, etc. The leading choices are as follows:
2. Deposit your crypto assets in a wallet. Some exchange platforms run their in-house staking programs, which allow their clients to start staking right after the transfer. However, in most cases, clients have to select, download, and activate a blockchain wallet and store their funds there. In such a case, you need to withdraw your assets from your exchange account and deposit them in a crypto wallet.
3. Check your hardware. Although staking is much more efficient than mining, it still requires a certain processing capacity and reliable Internet access. Those users who do not participate in the validation process due to the troubles with the network connection do not receive rewards.
4. Start staking.
Instead of earning interest on their own, many users prefer to combine their resources by forming staking pools. The more tokens you provide, the higher the chance that you will be chosen for the verification and obtain rewards for doing so. Hence, larger pools have statistically better chances to receive rewards. When looking for a pool, you should consider the following:
● Functionality. Check the servers to make sure they stay online as long as possible.
● Staking fees. Most pools charge fees for joining — make sure that the resulting interest would be more beneficial than doing so on your own.
● The size of the pool. The larger the pool is, the smaller your cut will be. Smaller pools offer higher interests but suffer from reduced chances to obtain rewards.
What Are The Risks Of Crypto Staking?
Even though this method of earning is highly optimized, it comes with specific risks and dangers. Before we go any further, we must address the legal issues.
Is Crypto Staking Legal?
Yes, crypto staking is 100% legal in most countries, although some countries establish strict tax rates and additional legal restrictions.
Is Crypto Staking Safe?
Decentralized exchange platforms maintain extremely high standards of cyber security. Nonetheless, such platforms may still be hacked. Moreover, crypto wallets rely on user-centered security, which means that although highly protected against hackers, they remain vulnerable when it comes to the methods of social engineering.
What are the risks of crypto staking?
The main dangers that may be encountered when dealing with tokens include the following:
● High volatility. This is arguably the main drawback of all existing cryptocurrencies. Even the most stable of them may experience rapid and significant swings. You can compensate for this risk by relying on long-term investments, which suffer less from such price movements.
● The lack of control over your assets. After locking up their assets, investors temporarily lose the ability to withdraw them. Each network has a specific waiting period during which you are unable to withdraw your tokens.
In addition to relying on long-term investments, one can minimize the risks by following the steps of traders with superior professional experience — such a strategy is great for those who wish to work with volatile tokens without risking too much.
Clients of Binance may even automate this process by using Jet-Bot — a specialized copy trading mechanism, which makes it possible to close deals at best entry and exit prices automatically. This tool comes with features for both long and short-term investments along with futures trading. By combining it with crypto staking investors can increase their earnings and reduce associated risks.
Crypto staking offers investors a highly beneficial way to earn interest by pledging their tokens to the validation process. In the case of top-staked cryptocurrency assets, the average reward rate for doing so reaches 11% annual yield. However, this method of investment is most suitable for those traders who prefer long-term investments, since short-term staking is too susceptible to the rapid fluctuations of prices.