Cryptocurrency staking or proof-of-stake platforms are currently experiencing considerable success. At present, crypto staking has become available on prominent platforms such as Solana, Cardano, and Polkadot. In addition to this, proof-of-stake is now dominating consensus mechanisms among high-value platform tokens. Since the launch of the beacon chain by Ethereum 2.0, institutional investors are showing proactive interest in staking.
One of the great examples of current staking traction is 28 million USD raised in the fundings by Blockdaemon, a well-known staking infrastructure provider. Moreover, Swiss banks are regulating digital assets on their infrastructure and showing consistent support for staking on Ethereum 2.0 platform. It has also previously shown support for the staking of Tezos.
Even though not many institutions are actually involved in this segment, we can see a remarkable amount of involvement from crypto exchanges and other crypto firms.
Let us understand the meaning of crypto staking
Cryptocurrency staking is a procedure where investors or users store their crypto assets on a blockchain network to support them. Furthermore, along with staking their crypto assets on the respective network, they also need to verify transactions.
All the cryptocurrencies that employ a proof-of-stake mechanism to perform transactions can participate in crypto staking.
The PoS mechanism consumes less energy in comparison to the proof-of-work mechanism. It is so because proof-of-work mechanisms need huge mining equipment that solves complex equations using the calculation power of supercomputers. Further, this entire process requires showing the amount of electricity, but in the case of proof-of-stake, the energy use gets lesser.
Moreover, users and investors can generate a good amount of passive income by participating in staking. It is beneficial because some cryptocurrencies offer users a higher rate of interest for staking.
Hence to make a profit through crypto staking, you need to understand how the entire process works.
Understanding the working of cryptocurrency staking in details
With cryptocurrencies that employ PoS mechanisms, the process of taking is basically the addition of new transactions on the blockchain network. Here participants are required to commit their crypto coins to the cryptocurrency protocol. Among all the participants, the protocol selects some validators and allows them to verify blocks of exchanges.
Here the user who commits the maximum number of currency on the network has the highest chance of becoming a validator.
Further, every time when a new block gets added to the network, the process of minting new crypto coins takes place. Additionally, the protocol distributes these coins as an incentive for staking to the validator of the respective block.
Every time a block is added to the blockchain, new cryptocurrency coins are minted and distributed as staking rewards to that block’s validator. The rewards are usually the same cryptocurrency that participants are staking, although some blockchains use a different type of cryptocurrency for rewards.
The users wanting to stake their cryptocurrency need to have cryptocurrency holding, which uses the POS model. Then they can move ahead to select the amount of cryptos they wish to give for staking. For this, users can use any prominent cryptocurrency exchanges platform.
You don’t have to worry about losing your coins through staking, as you will be the owner of your coins even when you stake them on the network.
You are just using them to contribute to the processing of the network. In fact, you have all the rights to unstake them anytime you wish.
However, the process of unstaking will take a while to confirm. Apart from this, you will also need to stake your coins at least for a predefined minimum amount of time.
Aside from offering passive income, the proof-of-stake mechanism also provides better scalability and can process higher numbers of exchanges.
How can you stake cryptocurrency?
As we already know by now, cryptocurrencies that support proof-of-stake are the only assets that can participate in staking. Fortunately, due to its robust efficiency, the PoS model is getting popular in the crypto world. And due to this, more cryptocurrencies are adopting the POS model.
You should not opt for cryptocurrencies that only promise higher rewards but no stability as a reliable investment. It is good to focus on staking and on earning high passive income. But if the chosen crypto is not suitable for long-term use, then soon you might get on the downside of staking.
There are many reliable cryptocurrencies that you can consider. such as:
- Pick a cryptocurrency and make an investment
Now that you know about suitable cryptocurrencies for staking, your next step will be choosing one among them. This process looks simple, but you have to pay extra attention to the source you are about to buy this cryptocurrency. We advise you to go for or any of the cryptocurrency exchanges platforms that come with built-in staking systems.
This step is vital because not every exchange platform will allow you to take your crypto assets.
In fact, currently, there are not many payment applications and stockbrokers that allow staking processes. Furthermore, you might not even get the option to transfer the cryptocurrency you purchase from their platform.
Hence by buying cryptocurrency from such platforms, you won’t be able to transfer your coins to the wallet you want. Thus, you won’t be able to stake your assets. Therefore we advise you to pick such exchanges that offer you total control over your cryptocurrency.
Let us look at the exchanges that use the proof-of-stake model:
The exchanges platforms, as mentioned above, allow a staking process for some of their crypto coins. It will enable you to stake currency you are purchasing quickly in just a few clicks.
In addition to this, you will also get the option to transfer your coins to another exchange where you want to stake them.
- Now it’s time to start the staking process through a pool or exchange
This step entirely relies upon the exchange platform from where you purchased crypto coins and which crypto coin you have.
If your exchange platform allows you to stake cryptocurrencies, then you can easily start the process on the same platform only. You have to find the staking option or staking page on your account. If there is any confusion, you can take help from the support section of the exchange platform.
Another way to start the process is by using a staking pool. Such pools contain vast amounts of cryptocurrency fundings. Here investors contribute their assets together in the pool in order to gain more rewards for staking.
However, to work on this type of system, firstly, you need to transfer your cryptocurrency to your digital wallet. Further, you need to select any of the staking pools and transfer your crypto coins to it using your wallet.
The staking process has become very simple, particularly because the majority of exchanges facilitate it. Once you choose a cryptocurrency to buy, it would be better to do thorough research on the workings of that particular crypto. Further, by doing so, you will be able to select a suitable staking procedure that will work in your favor and lead you to more rewards.
Pros of staking crypto
- It is the easiest method to earn good interest in your crypto holdings.
- There is no need for any additional device or equipment to perform crypto staking.
- You get to participate in enhancing the efficiency and security of the blockchain network.
- In comparison to crypto mining, it is more eco-friendly.
- One of the primary processes of the taking process is that users get to earn more crypto coins.
- The passive income through it can reach over 10 to 20% each year.
- In comparison to other methods, it is more profitable to invest in your capital.
- It comes with a minimum requirement. You just need to buy a cryptocurrency with a PoS model.
- The process helps in the smooth running of the entire network by quickly verifying the transactions.
Cons of staking crypto
- Cryptocurrencies are highly volatile in nature. The way they rise up suddenly, there is also a high chance of them dropping. In case your crypto coin experiences a huge price drop, then it can overshadow the amount of interest you earn through them.
- In the staking process, users are required to lock up their coins for a certain length of period. However, at the time your currencies are locked up, you will not be able to use them in any way. For example, you cannot buy new currencies with them or sell them.
- In case you want to do and take your cryptocurrency, then the protocol will take around seven days or even longer to confirm your request. Hence if something unpleasant happens around that period, you won’t be able to escape from that.
What is the future of cryptocurrency staking?
Along with the development of cryptocurrency space, the mechanisms for staking are also getting more innovative and widespread. With this new potential growth of the staking process, users are now exploring inventive ways to maximize their stake fundings. Hence, overall this practice is stimulating the token-based financial system around staking.
Typically, as per the built-in feature of staking fundings from users is locked for a certain time period. Hence, it is not convenient for users as they cannot use their assets for any activities. Further, users can unlock their funding amount by agreeing to unstake the assets and also not receive incentives anymore.
This is why a huge amount of liquidity gets locked up within the staking environment by default. It is one of the aspects of the PoS mechanism to secure its system.
A recent launch by persistence known as pSTAKE is a decentralized platform that can unlock some of the staking liquidity along with maintaining the high-security protocol of the staked assets. Pstake is compatible with any platform that supports staking; once the users deposit their fundings, the pSTAKE smart contract distributes tokens representing the number of deposits.
You can also use these tokens over an Ethereum decentralized finance network. For this, you need to lend them to protocol and receive interest in return. Also, you can put them into a decentralized exchange liquidity pool to gain shares from exchange charges that traders pay to the pool.
Another example that proves positive future development of staking is PolkaDot’s feature of crowd loan. Here, by lending a parachain, a project can easily join the mainchain of PolkaDot.
However, currently, it has limited slot numbers. Hence projects need to bid to get it at virtual auction. Here, the project can use the feature of crowd loan, where supporters can lend their DOT tokens up to the lease period of the parachain.
However, the project still needs to be more appealing to users by offering more interest than 13% of rewards that they can easily make by DOT staking over the PolkaDot platform.
The competition in the arena of staking is just beginning. However, looking at these projects with advanced features has the potential to bring new dynamics to the digital financial system.
Staking is in its developing stage, but the benefits users receive from it can potentially transform the current financial ecosystem. Additionally, it can essentially shift the way users obtain interests on their investments.
With a low risk in the space of yielding crypto, staking offers the option to log in passive income on crypto coins. Further, use it to earn more significant rewards. Experts anticipate that in the coming days, there will be more advancement in the staking.
Till now, the proof-of-stake mechanism has proven itself to be helpful for both investors and cryptocurrencies. The most beneficial thing about staking is the flexibility it offers to users to perform multiple transactions at a nominal price. Now that you have the only essential knowledge about stalking, you can partake in the process easily. However, we advise you to do your own research before investing in crypto staking.
Gargi Sinha is working as Senior Journalist at Confea. She has completed her Masters in Journalism from Delhi University. She has interest in crypto and blockchain technology.