What is staking in cryptocurrency? A guide for beginners
Investing and trading as the main ways to make money on cryptocurrencies overshadow the possibility of obtaining passive income from digital assets. Staking is still relatively unknown to the general public.
What is staking
Staking provides a percentage return on the initial investment. In this way, it vaguely resembles bonds or interest-bearing savings accounts.
During the staking process, the user locks up their assets in exchange for a reward. The reward is a certain percentage of the amount of locked coins. In addition to staking, there is another way to receive passive income from your assets – the so-called profitable farming. This does not require a long-term cryptocurrency lock. Coins are provided for liquidity or lending, their owner can deposit or withdraw funds from the farm at any time.
Staking and farming are fast growing areas of DeFi. Both methods provide an opportunity to receive additional income from the cryptocurrency you have.
For staking, an investor needs a cryptocurrency that is based on the Proof of Stake (PoS) algorithm. Top staking coins include Cardano, Solana and Avalanche, as well as Ethereum. You can easily buy any of these coins on the top cryptocurrency exchanges and then convert honestly earned 0.099 ETH to USD there if you urgently need it.
After acquiring assets, you choose the amount you want to stake on the respective blockchain. So the cryptocurrency holder becomes a validator, whose role is to confirm transactions. Additional tokens are awarded for this activity.
The most obvious criterion for comparing different betting pools is their profitability, but this is not the only factor to consider. Many coins have a minimum blocking period. Until it expires, you will not be able to use your assets. Waiting periods in different blockchains can be different.
Coins remain locked up for weeks or months. At the end of the period, access to funds is restored and remuneration is paid.
While the funds are blocked, no transactions with them are possible. There is a technical possibility to refuse the bet and withdraw your coins, but you simply will not get anything.
Another important parameter is the minimum investment amount. In some projects, the travel threshold is low or non-existent. In others, the minimum investment amount may be prohibitive for many token holders. For example, in the Ethereum network, the minimum threshold is 32 ETH.
How to bet
First of all, you need to buy tokens and store them in your wallet. Many major crypto exchanges offer to bet directly on their platform. In addition, there are platforms that specialize exclusively in betting.
Solo or pool?
Solo validators get the most rewards, but it often takes a big investment to become one. An easier and cheaper way to join staking is the staking pool.
In pools, users pool their assets and thereby increase their chances of block validation and rewards. This option is only available on blockchains that use the Proof-of-Stake (PoS) consensus mechanism.
The pool is managed by an operator or betting service. To join a pool, participants lock funds on a shared blockchain address or wallet.
Any investment in cryptocurrency comes with risk, and staking is no exception. Staking does not protect against the volatility of the underlying asset. Price fluctuations can be especially painful for new investors and those who are not very interested in this activity.
Until the blocking period expires, the value of the asset may drop sharply, and the loss may exceed the reward. You will be nervous because you didn’t exchange 0.111 ETH to USD or at least usd t in time in the same way as when investing. That is, this method is suitable for purposeful long-term investors.
Since the technology is quite new and is at the stage of active development, some risk of cyber theft is not excluded.