Top 7 things you need to know about crypto staking

Have you heard of the term “crypto staking” but aren’t quite sure what it means? If you’re wondering how to put your crypto investments to work for you to make some passive income, you might want to consider trying out staking.

Crypto staking is a way to earn money from cryptocurrencies that operate on a proof-of-stake style blockchain. It works similarly to earning interest on a savings account in a bank. Staking is a great, beginner-friendly way to earn money from your crypto. But what should you know before you get started?

Terms to know

1. Proof-of-stake: proof-of-stake is an alternative consensus mechanism to proof-of-work style blockchains.
2. Proof-of-work: blockchains use mining to help verify each transaction that is added to the blockchain.

Essentially, every miner is competing against the others to be the first one to solve the complex cryptography puzzles needed to add a new transaction to the blockchain. Proof-of-stake systems, on the other hand, rely on validators who “lock-up” a portion of their crypto in order to participate in validating the blockchain.

Then, instead of competing against each other, validators are selected at random. This way, the validators have an economic incentive to maintain the integrity of the blockchain.

Here are 7 things to know about crypto staking.

#1. Some cryptos have minimum requirements to participate

One thing to keep in mind is that some cryptos have minimum requirements that you’ll need to meet to participate in crypto staking. This will of course depend on the crypto you’re trying to stake.

For example, Ethereum requires participants to stake at least 32 ETH. Avalanche requires at least 2,000 AVAX to be a validator, and 25 AVAX to be a delegator. However, some cryptos that don’t have any requirements, such as Cosmos and Solana.

In addition, you’ll want to make sure you don’t stake all of your crypto. Make sure you leave a little bit to cover any transaction or gas fees.

#2. You can delegate your stake

If you don’t want to be a validator yourself (or don’t have enough crypto to become one), you can delegate your stake to a validator and sit back and collect the profit.

This is the easiest, most beginner-friendly way to enjoy the benefits of crypto staking, and it’s also the simplest to set up on a centralized exchange or wallet. With this method, you will choose a validator and delegate a certain amount of your crypto to them to stake for you.

When you do this, you will be joining a staking pool. When that validator node successfully validates the transaction, the reward will be distributed to all of the delegators in the pool.

It’s important to note that the validator will not own your crypto, and you will be able to unstake your coins at any time after the lock-up period.

#3. Different validators have different commissions

If you join a crypto staking pool, the validator will take a commission from the earnings. The amount you earn in interest will depend on how much commission they take. Do your research before selecting a validator to stake with to find one that offers the best rewards.

However, don’t choose the validator with the lowest commission rate. Be sure to take into account the validator’s performance and success rate. Because if the validator makes mistakes, this could end up affecting you.

#4. It’s possible to lose your stake

If a validator makes a mistake, such as not failing to participate in the network consensus or inaccurately voting, this will result in a punishment that could also affect you as a delegator.

When a validator makes a mistake, it results in “slashing,” a process by which a portion of your crypto investments is taken by the network as a penalty.

For this reason, it’s important to choose a validator with a good reputation. Another factor to keep in mind when choosing a validator is that choosing smaller validators will help to maintain the decentralization of the system.

#5. Not every wallet offers staking for every crypto

Not every wallet or exchange supports staking for every crypto. For example, Coinbase currently only supports staking for Cosmos, Tezos, Ethereum 2, Algorand, Dai, and USD Coin. The popular exchange Kraken, on the other hand, has more options, including Polkadot, Cardano, Solana, and more.

In addition, you should consider that different cryptos have their own official wallets that may get you better rewards compared to other options. For example, Solana has two official wallets that were built specifically with SOL in mind: SolFlare and Phantom.

#6. You can’t unstake your crypto whenever you want

Typically, there is a fixed lock-up period where you cannot touch your staked crypto investment in any way. This lock-up period will vary depending on the cryptocurrency being staked. For example, AVAX has a minimum lock-up period of two weeks, and a maximum of one year.

In addition, the unstaking process itself can take days or even weeks, so you won’t see the crypto back in your account right away.

The purpose of this is to maintain the integrity of the validation system, but the only downside for you as a validator or delegator is that if the price of the crypto increases or decreases drastically during the time you have it staked, you won’t be able to make any trades.

#7. The longer you stake your crypto, the better chance you will have of earning rewards

If you do decide to be a validator, you should keep in mind that while the selection process is random, you’ll have a better chance of being chosen depending on how much crypto you have staked and how long you have it staked for.

Typically, the more you have and the longer you keep it staked, the better the chance of being chosen. As a delegator, this is why joining a crypto staking pool is beneficial, because by combining your crypto investments with others, you have a better chance of earning interest on your crypto.

What’s the future of crypto staking?

In 2020, Etheruem announced they were transitioning away from a proof-of-work model and moving towards a proof-of-stake system, called Ethereum 2.0.

The reason behind the move was to speed up transaction times, lower gas fees, and become more energy-efficient.

Considering this news, along with the fact that other major cryptos such as Cardano, Solana, and Avalanche already run on proof-of-stake, it seems clear that many companies are embracing PoS as a means to a faster, more sustainable blockchain system.