A Beginner’s Guide to Crypto Staking

Cryptocurrency staking is a popular way for crypto investors to earn rewards, but it can be a bit confusing if you’re new to the world of digital assets.

Plus, there are two different kinds of staking: the traditional method used to help secure the blockchain network, and a newer method where you lock up your coins to earn rewards.

Let’s break down what these two kinds of staking are, how they work, how you can take part, and what regulations you need to be aware of.

Fair warning – the first kind may seem a little overwhelming – if so, just skip down to the section about the simpler, more accessible “newer kind of staking.”

The Original Crypto Staking

Originally, the phrase staking referred to a process that allows holders of certain cryptocurrencies to earn rewards by participating in the network’s operations.

When you stake your crypto, you lock it up in the blockchain network to help validate transactions and secure the network. In return, you receive rewards, often in the form of additional cryptocurrency.

To understand how this classic staking works, it’s important to know about “proof of stake” (PoS), a consensus mechanism used by some cryptocurrencies to process transactions and create new blocks in the blockchain.

Here’s a more detailed rundown of the classic staking process:

When you stake your crypto, you commit a certain amount of your digital assets to the blockchain network. This is done by locking your coins in a wallet specifically designed for staking. Once your coins are staked, they become part of the network’s pool of resources used to validate transactions.

In a proof of stake system, validators are chosen to confirm transactions based on the number of coins they have staked. This means that the more coins you stake, the higher your chances of being selected as a validator. Validators are crucial for the network because they ensure that transactions are accurate and secure.

When a validator is selected, they verify the transactions within a new block and add it to the blockchain. This process involves checking the authenticity of the transactions and ensuring that the sender has enough funds to complete them. Once the block is validated and added to the blockchain, the validator receives a reward. This reward is frequently in the form of additional coins of the same cryptocurrency that was staked.

The reward system incentivizes validators to act honestly and efficiently. If a validator attempts to manipulate the network or validate fraudulent transactions, they can lose a portion of their staked coins as a penalty. This mechanism helps maintain the security and integrity of the blockchain.

If you decide to unstake your coins, there is typically a waiting period before you can withdraw them. This period can vary depending on the cryptocurrency and the network’s rules. During this time, your staked coins are still helping to secure the network, but you won’t earn rewards.

A Newer Kind of Staking

More recently, the term “staking” has evolved a bit to describe a process that doesn’t necessarily involve transaction validation.

Instead, it involves locking up your coins in order to earn rewards through mechanisms designed to support the project or platform. This type of staking is often part of a decentralized finance (DeFi) platform or a project’s incentive program.

In this newer context, staking works as follows:

When you lock up your crypto assets on a platform, you agree to keep your assets within the platform for a specified period. In return, you earn rewards, which can be additional tokens, interest, or other incentives.

This helps maintain the network’s stability by reducing the available supply of the cryptocurrency, encouraging users to hold their assets longer and support the project’s ecosystem.

You can think of it as the Certificate of Deposit (CD) of the crypto world.

Platforms that offer this kind of staking usually have user-friendly interfaces, making it easy for crypto holders to participate. You simply select the amount of crypto you want to stake, choose the duration, and confirm the transaction. The rewards are typically distributed periodically, and some platforms allow you to compound your earnings by staking the rewards you receive.

How Can You Take Part in Staking?

Taking part in either type of staking is relatively straightforward. First, choose a staking coin. Not all cryptocurrencies support staking, but popular ones include Ethereum (ETH), Cardano (ADA), and Polkadot (DOT). Research which coin you want to stake based on the rewards and the project behind the coin.

Next, you’ll need a crypto wallet that supports staking. Some wallets are specifically designed for staking, making the process easier. After you have a wallet, buy the cryptocurrency you want to stake from an exchange and transfer it to your staking wallet.

For classic staking: You can then join a staking pool or become a validator. If you’re just starting, joining a staking pool might be the best option. A staking pool is a group of crypto holders combining their resources to increase their chances of being selected as validators. If you have a significant amount of the cryptocurrency, you might consider becoming a validator on your own. Follow the instructions on your wallet or staking pool to lock up your crypto and start earning rewards.

For modern staking: you can participate through various DeFi platforms or directly through some crypto projects’ official websites. Make sure to follow their guidelines for locking up your assets and earning rewards.

What Regulations Are Involved?

Crypto staking, like other cryptocurrency activities, is subject to various regulations that can vary by country.

In many countries, staking rewards are considered taxable income. This means you’ll need to report them on your tax return and pay taxes accordingly.

Some regions have specific compliance requirements for crypto staking. For example, in the US, exchanges and staking platforms must adhere to regulations set by the Securities and Exchange Commission (SEC) and other financial authorities.

Regulations often aim to protect consumers from fraud and ensure the security of their investments, so make sure to use reputable staking platforms and keep your crypto secure.

Moving Forward with Staking

Crypto staking offers a great way to earn rewards on your digital assets while supporting the blockchain network and contributing to its stability.

If you believe in the ideals behind the blockchain and web3, this is a great way to get involved in a positive way and make money as well.

Check out my docuseries, Uncensored Crypto, to learn more about why I believe the blockchain and web3 have the potential to change the world for the better.