Staking is a new way to earn passive income from cryptocurrency without having to mine or trade. What exactly is staking? And why should I care?

Cryptocurrencies like Bitcoin and Ethereum have become wildly successful over the last decade. They’re now worth billions of dollars each, and they’ve spawned hundreds of other cryptocurrencies.

But these coins aren’t always easy to get your hands on. If you want to invest in them, you’ll usually need to purchase them through an exchange. This means you’ll need to pay fees, wait for confirmation, and then hope you don’t lose your investment.

Or if you want to create cryptocurrency and be rewarded through it, you can do that too. The problem with this approach is that it requires technical knowledge and investment into mining hardware. Now there is an additional way to earn money through crypto currency dubbed 'staking'.

What is Crypto Staking and How Does it Work?

Staking is a way to earn passive income by lending out your crypto assets while they are idle. This means that if you have some cryptocurrency with that can be staked sitting around doing nothing, you can contribute them to be staked in staking pool. The cryptocurrency you decide to stake will be locked into the pool which will provide support for the blockchain network as well as help confirm transactions on the network.

Staking a cryptocurrency is only possible if the cryptocurrency uses a Proof of Stake consensus algorithm. Many cryptocurrencies use proof of work like Bitcoin and Ethereum. These problems require high computing power and high electricity consumption. However, this process also consumes a lot of energy and creates heat. 

As a result of these drawbacks, many cryptocurrencies are now using Proof of Stake which is much better as it requires less energy than Proof of Work. It has been proven that Proof of Stake is more efficient and scalable than Proof of Work. Because of these advantages Ethereum 2.0 will be updated to use a Proof of Stake system and as a result means you can stake Ethereum.

If you want to learn more about Ethereum 2.0 and the changes coming then check out the article below

Ethereum 2.0 - When is ETH2 coming out? (2022)

The main benefit of crypto staking is that when you lend your coins to the network, you get paid an annual percentage yield (APY) or staking rewards. These rewards can vary drastically between cryptocurrencies but generally speaking most cryptocurrencies pay out somewhere between 1% and 10%.

There are two types of staking: active and passive. Active staking involves actively contributing to the blockchain through mining. Passive staking does not involve any additional effort from the user.

How to Start Crypto Staking

In order to participate in staking you need to find a pool where other users are staking. Once you’ve found a pool you can add your wallet address to the list of wallets being staked. You can do this through a cryptocurrency exchange such as Binance, Coinbase, Kraken etc. Alternatively, there are staking pools available directly on the website. Once you ’re connected to the pool you can start staking.

To first purchase the cryptocurrency you wish to stake, you may require a separate crypto wallet where you can fund your account to purchase the initial cryptocurrency. Most crypto exchanges however will allow you to fund the account directly without having to transfer crypto in from external wallets.

Once you have purchased your cryptocurrency you should then be allowed to stake it within the pool. You should be able to monitor the investment through the crypto exchange or platform you have staked your cryptocurrency on.

Pros and Cons of Staking Crypto

Pros:

• You can earn additional cryptocurrency

So this being the most obvious advantage to staking your cryptocurrency, you can earn additional cryptocurrency and grow your investment through staking. Although rates can vary widely between cryptocurrencies, there are plenty of options that allow staking where you can grow your funds. Some example cryptocurrencies will be listed further in this article.

• Provides a place to keep your cryptocurrency active

One of the biggest benefits of staking is that it provides a place to keep your currency active. One phrase you hear a lot when learning about personal finance is 'making your money work for you'. Well we can do one better with this. Not only have you purchased cryptocurrencies which can likely grow in value over a long period of time but in addition by staking the cryptocurrency, the quantity of that cryptocurrency you are staking can increase. So you end up with more crypto that is hopefully a higher value as well.

Cons:

• The value of your crypto may drop even if staking

Although with staking you would expect your cryptocurrency quantity to increase, you still have the risk that the value of the cryptocurrencies could drop. This could result in you losing money on your investment overall. This risk is present with any form of investing so always ensure you carry out your due diligence.

• Staking rewards on staking pools can change

You may be amazed at some point and see a staking pool with crazy high returns such as 60-100%. These often may be too good to be true as the staking rewards can also be lowered at any given point depending on the cryptocurrencies performance. For this reason I would be careful as I know seeing these numbers can be tempting

Example Cryptocurrencies You Can Stake

1. Ethereum

Ethereum is a decentralized platform that runs smart contracts, enabling the development of Dapps (decentralized applications). It enables users to create their own tokens on its network, which can be used as an alternative currency or even a store of value.

Ethereum, as mentioned earlier in this post, won't have full Proof of Stake capabilities until Ethereum 2.0 is launched however you can begin staking Ethereum on Coinbase in anticipation of the Ethereum 2.0 launch.

2. EOS

EOS is a blockchain-based operating system for scalable decentralized apps. It was created by Dan Larimer, Block.one and it is one of the first blockchains to implement Delegated Proof of Stake consensus algorithm. EOS uses delegated proof of stake to help scale up the number of transactions per second while maintaining decentralization.

3. Cardano

Cardano is a third generation public blockchain project based on peer review scientific research into decentralization, security, and scalability. The team behind Cardano has been working on the project since 2015. Cardano aims to become a global standard for mass adoption.

4. Polkadot

Polkadot is a new open source protocol that aims at solving the problem of interoperability between different chains. This means that all the existing cryptocurrencies will be able to interact with each other through Polkadot.

5. Chainlink

Chainlink is a decentralized oracle network that enables smart contracts to securely access off-chain data feeds, web APIs, and traditional bank payments. Chainlink uses Proof of Stake to secure transactions on the network. Once again, this Proof of Stake mechanism is what allows crypto staking.

Summary

Crypto staking is a great way to earn passive income from your investments. However, there are risks involved and you need to make sure you understand them before getting started. As long as you are aware of these risks then you should be fine. For any financial advise contact a financial professional. Anything seen throughout my blog is purely my own opinion.

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Thanks for Reading!

FAQ

Is Crypto Staking Profitable?

Staking rewards are similar to stock dividend payouts, in that both are a form of passive income. They don’t require a user to do anything other than holding the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater profit potential there will be in general, thanks to compound interest.

Source: (sofi.com)

What is proof of stake?

Proof of stake in crypto is a consensus mechanism -- a way for a blockchain to validate transactions. The nodes in a blockchain must be in agreement on the present state of the blockchain and which transactions are valid.

Source: (fool.com)

What is a staking pool?

A staking pool lets you come together with other stakers and combine (or “pool”) your resources with others—including others with coins to stake and people with the necessary computing power and technical knowledge to act as validators or run the pool. This will earn you a share of the rewards from forging the blocks of a proof-of-stake blockchain.

Source: (n26.com)