What is Crypto Staking? The Latest Premier Guide 2024

cdLast Updated: March 5, 2024

4 minutes read

One way to profit from cryptocurrencies is to sell your investment when the market price rises. There are also other ways to earn money through cryptocurrencies, such as staking. By staking, you can put your digital assets to work and earn passive income without selling them.

In some ways, staking is similar to depositing cash in a high-yield savings account. The bank lends out your deposits, and you can earn interest from your account balance.

In theory, staking is not much different from the bank deposit model, but the analogy ends there. Here’s what you need to know about cryptocurrency staking.

What is Staking?

Staking refers to locking up your crypto assets for a period to help support the operation of a blockchain. In return for staking your cryptocurrencies, you can earn more cryptocurrencies.

Many blockchains use a proof-of-stake consensus mechanism. In this system, network participants who want to support the blockchain by verifying new transactions and adding new blocks must “stake” a certain amount of cryptocurrency.

Staking helps ensure that only legitimate data and transactions are added to the blockchain. Participants attempting to get a chance to verify new transactions propose locking up a certain amount of cryptocurrency as a form of insurance.

If they incorrectly validate faulty or fraudulent data, they might lose part of or all of their stake as a penalty. But if they correctly validate legitimate transactions and data, they earn more cryptocurrency as a reward.

Popular cryptocurrencies like Solana (SOL) and Ethereum (ETH) use staking as part of their consensus mechanisms.

Proof of Stake

Staking is how proof-of-stake cryptocurrencies cultivate a functional ecosystem on their network. Generally, the larger the stake, the greater the chance for validators to add new blocks and earn rewards.

As validators accumulate a significant amount of stake delegations from multiple holders, this can signal to the network that the validator’s consensus votes are trustworthy, hence their voting weight is proportional to the amount of stake attracted by the validator.

Moreover, the stake doesn’t necessarily only contain one person’s tokens. For instance, holders can participate in staking pools, where staking pool operators handle all the heavy lifting of validating transactions on the blockchain.

Each blockchain has its set of rules for its validators. For example, Ethereum requires each validator to hold at least 32 ETH, which, as of the time of writing, is priced at approximately $116,032. Staking pools allow you to collaborate with others and stake with less amount. However, one thing to note is that these pools are often built through third-party solutions.

How Does Staking Work?

If you own cryptocurrencies that use a proof-of-stake blockchain, you are eligible to stake your tokens. Staking locks up your assets to participate and help maintain the security of that network’s blockchain. In exchange for locking up your assets and participating in network validation, validators receive rewards in that cryptocurrency, known as staking rewards.

You can also set up a cryptocurrency wallet that supports staking.

When you choose a plan, it tells you what staking rewards it offers. For example, the cryptocurrency exchange CoinDCX offers an annual percentage yield (APY) of 5%-20% for Ethereum 2.0 staking. Users must stake at least 0.1 ETH to start

Once you commit to staking cryptocurrency, you will receive the promised return according to a schedule. The plan will pay you the return in the staked cryptocurrency, which you can then hold as an investment, use for staking, or trade for cash and other cryptocurrencies.

Benefits of Staking Cryptocurrencies

Earn passive income: If you do not plan to sell your cryptocurrency tokens in the near future, staking allows you to earn passive income. Without staking, you wouldn’t generate this income from your cryptocurrency investment.
Easy to get started: You can quickly start staking through exchanges or crypto wallets.
Support your favorite crypto projects: “Another benefit of staking is that it helps improve the security and efficiency of the blockchain project you support. By staking some of your funds, you can make the blockchain more resistant to attacks and enhance its capacity to process transactions,” says Tanim Rasul, Chief Operating Officer and Co-founder of National Digital Asset Exchange, a Canadian cryptocurrency trading platform.

Risks of Staking Cryptocurrencies

When you stake tokens, you may need to lock them up for weeks or months, depending on the plan. During this time, you will not be able to cash out or trade your tokens.

However, since you would be selling on the secondary market, you need to find willing buyers or lenders. Additionally, there is no guarantee that you can do so or recover all your funds in advance.

Cryptocurrencies are also highly volatile investments, with double-digit price fluctuations common during market crashes. If you lock your cryptocurrency in a program that locks you in, then you won’t be able to sell during an economic downturn. The staking platform you choose can offer generous annual returns, but you could still suffer losses if the price of the token you staked falls.

Many proof-of-stake networks use “slashing” to penalize validators who engage in improper behavior, destroying some of their stake on the network. If you stake with a dishonest validator, you could lose part of your investment as a result.

Should You Stake Cryptocurrencies?

Staking is a good option for investors interested in generating returns through long-term investments and who do not care about short-term price fluctuations. If you may need to recover funds in the short term before the staking period ends, you should avoid locking up funds for staking.

Rasul advises you to carefully review the terms of the staking period to see how long the staking period lasts and how long it ultimately takes to recover your funds when you decide to withdraw.

He recommends working only with companies that have a good reputation and high security standards.

Experts say that if the interest rate seems too good to be true, you should proceed with caution.