4 things you need to know about crypto staking

If you’re new to crypto investing, you may not realize that there are various ways to make money from your crypto besides just investing. Investors can make money from mining their own crypto, lending it out, or staking it. But what exactly does crypto staking mean?

We’ll take a look at everything you need to know about how to stake cryptocurrency, including how it works, which coins you can stake, and how you can get started.

What is crypto staking?

First, let’s get into a quick overview of what staking is. Crypto staking offers a way to make money passively from your crypto without needing to invest in mining equipment, keep your eyes on the market for a good trading opportunity, or lend out your crypto.

Staking crypto is a blockchain validation technique that offers a more secure, energy-efficient, and fair alternative to the traditional proof-of-work method of blockchain validation.

For you as an investor, staking is almost like having a savings account at a bank and receiving interest for keeping your money in the account.

How staking crypto works

Now let’s get into a bit more detail and break down how the process of staking crypto works exactly.

Before you can understand how crypto staking works, you’ll need to understand a concept called “proof-of-stake,” what makes it different from “proof-of-work,” and why it may be a better alternative. 

First, proof-of-work is used in blockchain technology to validate the blockchain and make sure that it is secure and functioning properly. 

Proof-of-work is done by crypto miners, who use computers with strong processing power to solve the complex cryptography puzzles that make up the ledger of public transactions in the blockchain. Proof-of-work is used in some of the biggest cryptocurrencies out there, most notably Bitcoin.

So, what’s wrong with proof-of-work? Why is there a need for proof-of-stake in the first place?

Proof-of-work involves different miners competing to be the first to solve a cryptography puzzle. This leads to the potential for mining companies with stronger computers and faster processing power to dominate over smaller miners who can’t compete. 

When this happens, it puts the blockchain in a position to be taken over by a majority rather than remaining decentralized. This could lead to fake transactions being added to the blockchain, which compromises the blockchain’s security and the currency’s validity. 

In addition, this process uses a ton of energy and electricity.

This is why proof-of-stake was developed as a viable alternative. Proof-of-stake utilizes a process to validate the blockchain called crypto staking. 

When you stake cryptocurrency, this essentially means you are “locking up” some of your crypto as collateral in exchange for being randomly selected as a validator of the blockchain. In exchange for successful validations, you receive a reward, usually of more crypto. 

On the other hand, you will be punished for any false validations by having your coins taken away or “slashed.”

Slashing can also affect you if you stake your coins using a platform to validate on your behalf. If they try to trick the system, then your coins will get slashed. For this reason, it’s important to research the reputations of companies before staking your crypto with them.

However, proof-of-stake gives all the participants an economic incentive to not try to trick the system. And because validators are selected at random, this ensures that no single group can ever dominate the system.

Which coins can you stake?

Not every type of cryptocurrency uses a proof-of-stake system. The following is a list of five of the most popular crypto coins you can stake:

• Cardano 
• Tezos
• Algo
• Ethereum
• Solana

How much you earn in rewards depends on how much crypto you have staked. Also, some cryptos, such as Ethereum, require a certain amount of coins to participate in staking.

One reason crypto investors are drawn to staking as a method to earn income from crypto is because the nominal yield rates from staking are much higher overall than they are for traditional investing or keeping a savings account with your bank.

The exact nominal yield rates of your staked crypto will depend on which type of crypto you stake, how much of it you stake, and how long you’ve had it staked for.

However, don’t just choose to stake a particular crypto because it offers higher rewards. Instead, consider other factors to make sure that investing in that crypto is a good investment for you.

How to stake a coin in your digital wallet to get started staking

You can stake directly from your wallet, which is a great way to secure your coins while earning passive income. 

Staking can be as simple or technical as you make it. You can validate with your own software, with no need to buy expensive equipment like you would if you were validating in a proof-of-work system.

However, staking through an exchange that offers a built-in staking feature, such as Coinbase or Binance, is a much easier option. 

With this option, you can just sit back and collect the rewards, though the exchange will usually take a cut of your profit as commission. It’s also not necessary to have a wallet in this case because your coins will be kept on the exchange, though a wallet is usually better to have maximum security.

There are also decentralized staking pools that you can join as an alternative to exchanges. A pool is when a group of people combine their coins to create a larger stake. This gives them a better chance of being chosen as a validator. Staking pools often have a higher barrier to entry in order to participate.

The easiest way to start staking from your wallet is to do some research to decide which crypto you will purchase and stake.

Next, find a secure crypto wallet that you can use, and select a crypto exchange that offers staking with that particular currency and open an account with it.

Then, you just need to make sure you have enough coins you can stake in order to meet the barrier to entry.

Is crypto staking right for you?

Learning to stake cryptocurrency is a great beginner-friendly strategy for making money passively from your crypto investments, without the need to constantly be looking for trading opportunities. 

Staking is usually good if you’re looking for a long-term investment strategy to grow your crypto earnings. And unlike mining, it’s much easier to get started, and nearly anyone can participate.