As cryptocurrencies become more mainstream, the need to protect your investments becomes increasingly important. Not only is it enough to invest in crypto, but the average crypto-native must also take the proper steps to increase their portfolio and grow their wealth.
One way to do this is through staking. Staking is the process of locking up your coins to earn interest or rewards.
By doing so, you are essentially giving up some immediate liquidity to earn more later on down the road. Staking is also important for most proof-of-stake blockchains as it is how new blocks are validated and the consensus is reached.
So, if you are looking to add some extra income or want to help secure a particular blockchain, staking might be the way to go. In this article, we will guide you through the basics of staking crypto.
What Is Staking?
As mentioned, staking is the process of locking up your digital assets to earn rewards. It is similar to earning interest on a savings account at a bank. The main difference, however, is that you are not giving your coins to anyone else, but rather keeping them in your wallet.
This process usually requires you to have a minimum amount of the specific cryptocurrency in your wallet as well as to keep your wallet online and connected to the network most of the time.
The more coins you stake, and the longer you keep them staked, the higher rewards you will earn. These rewards usually come in the form of newly minted coins, but they can also come from transaction fees.
It is important to note that not all cryptocurrencies can be staked. Only those that use a proof-of-stake consensus algorithm can be staked. The most popular proof-of-stake coins are:
- Ethereum (ETH) – ETH 2.0 is currently being rolled out
- Tezos (XTZ)
- Cosmos (ATOM)
- Cardano (ADA)
- EOS (EOS)
- Kusama (KSM) – sister-chain to Polkadot
- Polkadot (DOT)
- Algorand (ALGO)
There are many more proof-of-stake coins, but these are some of the most popular and well-known.
How Does Staking Work?
As mentioned, staking requires you to lock up your coins in a wallet to receive rewards. This process is different for each cryptocurrency, but the general idea is the same.
For example, let’s say you want to stake Ethereum. The first thing you need to do is send your ETH from an exchange into a personal wallet that can hold ETH. We recommend using MetaMask, MyEtherWallet, or Trust Wallet for this process.
Once your ETH is in your wallet, you can connect your wallet to a staking pool or validator. This connection will allow you to start earning rewards for staking your ETH.
A validator in a proof-of-stake network is essentially a node operator that helps to secure the blockchain and validate transactions. You can think of it as a miner in a proof-of-work network.
Most staking pools or validators work the same way. You send your coins to the pool or validator, and the pool/ validator will then split the rewards members of the pool.
What Are the Risks of Staking?
There are a few risks that come with staking your cryptocurrency that you should be aware of before you start:
1. Staking Pools: When you stake your coins in a pool, you are entrusting your coins to that pool. If the pool is hacked or goes bankrupt, you could lose your coins. Make sure to do your research on any staking pool before you deposit your coins.
2. Slashing: Some Proof of Stake cryptocurrencies have a “slashing” risk. This means that if you are caught validating a fraudulent block, you could lose some or all of your staked coins. This risk can be minimized by only staking your coins in reputable pools and following the rules of the network.
3. Hardware Risks: If you are staking your coins on a dedicated piece of hardware, there is always the risk that the hardware could fail or be damaged. Make sure to have a backup plan in place in case your hardware fails. Some networks punish validators for downtime, so it’s important to have a plan to minimize your losses in case of hardware failure.
4. Software Risks: If you are running the software for your staking node on your computer, there is always the risk that something could go wrong with the software and you could lose your coins. Make sure to follow the best practices for running a staking node and to have a backup plan in place in case something goes wrong.
5. Network Risks: Some Proof of Stake networks are more secure than others. Make sure to do your research on the security of the network before you stake your coins. Some networks may be more susceptible to 51% attacks or other attacks that could lead to the loss of your coins.
6. Inflation: Some Proof of Stake networks have higher inflation rates than others. This means that if you are staking your coins in a high inflation rate network, your rewards may be worth less in the future. Make sure to take inflation into account when choosing which Proof of Stake network to stake your coins in.
7. Lock-up Periods: Some Proof of Stake networks require you to lock up your coins for a certain period to be a validator. This means that you cannot sell or trade your coins during the lock-up period. Make sure to take this into account when choosing which Proof of Stake network to stake your coins in.
8. Minimum Stake Amounts: Lastly, some networks have minimum stake amounts that you must deposit to qualify as a validator. If the threshold is high, you could lose your chance at staking your coins.
9. Exit Scams: Unfortunately, there have been cases of staking pools and exchange exit scamming their users. An exit scam is when a platform or service suddenly shuts down and takes all of the users’ funds with them. If you are using a staking pool or exchange, make sure to do your research on the platform before you deposit your coins. Look for reviews and user feedback to get an idea of whether or not the platform is trustworthy.
Staking your cryptocurrency can be a great way to earn passive income. However, there are some risks that you should be aware of before you start. Make sure to do your research and only stake your coins in reputable pools and exchanges.