There are so many ways to gain profit from cryptocurrency. Most people are familiar with trading and hodling to gain profit. However, there's another method called "crypto staking" for gaining profit. What is crypto staking and how does it work? Here is a comprehensive guide for dummies.
What is crypto staking?
Crypto staking is a method to earn rewards by locking crypto assets in a specialized wallet that supports staking for a specific period. When involved in crypto staking, it means the investors actively participate in validating transactions on the blockchain using the Proof of Stake (PoS) mechanism.
The locked crypto assets serve as collateral for validators in the transaction validation process. If a validator behaves dishonestly, a portion of the locked crypto assets may be forfeited as a penalty, known as slashing. If it's successful, validators will receive rewards in the form of crypto assets derived from creating new blocks or transaction processing fees.
In short, crypto staking is similar to a deposit system. In the deposit system, banks borrow money from your deposits and you will earn interest from those deposits. Meanwhile, in crypto staking, investors can generate passive income from their digital assets without having to sell them.
How does crypto staking work?
Staking has become one of the popular methods to earn passive income from crypto. Here is the explanation of how crypto staking works. Check it out!
Step 1: Locking crypto in a staking pool
Staking participants send coins to a specific address for staking. During this period, the coins cannot be used for other transactions or withdrawn, making them a form of security for the network.
Step 2: The algorithm randomly selects a validator
In the staking system, not all participants automatically become validators. Instead, the right to become a validator is typically based on criteria such as the amount of coins staked, staking duration, and other factors. Some networks even employ random selection methods, with the likelihood of being chosen influenced by the amount of coins staked.
Step 3: The selected validator produces a new block
Validators will validate transactions occurring on the network. Once validated, they add them to a block and append the block to the blockchain. This ensures the integrity and security of the entire network.
Step 4: Other validators verify the transaction block
In exchange for their participation in securing the network, validators receive rewards. The source of these rewards is from transaction fees or block creation.
Step 5: The transaction block is added to blockchain
If validators act maliciously or dishonestly, the coins they stake can be forfeited or known as slashing. This mechanism is implemented to incentivize honesty and maintain network integrity.
Step 6: Validators receive staking rewards
After the staking period concludes, the staked coins are returned to their owners, including any rewards earned during the process.
5 Things to Consider Before You Stake
Make sure not to make the wrong decision. Here are 5 things you should consider in staking assets:
Staking Rewards (APY)
The annual percentage yield (APY) offered by a coin is a crucial factor. Higher APY indicates greater potential returns, but it's important to assess the coin's stability and potential for long-term growth.
Market Potential
Another essential aspect to consider is a coin's market value and growth potential. Investing in a coin with a high market cap can lead to better results, especially if the APY is also offers significant value.
Stability
Some investors prefer coins with lower volatility, while others are willing to accept more risk for potentially higher rewards. Consider your risk profile when selecting coins to stake.
Tax Reporting Simplification
Staking rewards are often considered income and subject to taxation in many countries. Ensure that the coin you stake offers effective reporting through your chosen staking platform.
Entry Points
Joining a project during its initial stages or presale can provide better rates and benefits. Since timing the market is challenging, many investors choose to dollar-cost average or gradually enter their position over time.
Popular Staking Assets
Here is a list of the 10 assets most commonly used for staking by investors. They are assets that utilize the proof-of-stake (PoS) mechanism. Check it out!
-
Tron (TRX)
Tron (TRX) is one of the cryptocurrencies operating on a blockchain network called the Tron Network. TRX holders can lock a certain amount of TRX in smart contracts on the Tron Network. Several decentralized applications (dApps) running on the Tron Network enable users to stake TRX as part of the functionality of these dApps.
-
Tezos (XTZ)
Tezos (XTZ) is a cryptocurrency that operates on the Tezos blockchain network. Staking in Tezos differs from several other staking protocols. In Tezos, the staking process is known as "baking" and "endorsing".
-
Solana (SOL)
Solana (SOL) is a cryptocurrency that operates on the Solana blockchain network. The Solana staking process involves locking a certain amount of SOL in a wallet or smart contract as security for the network. In the case of Solana, staking is known as "delegated staking."
-
Cosmos (ATOM)
Cosmos (ATOM) is a cryptocurrency that operates on the Cosmos blockchain network. The staking process in Cosmos is known as "delegated staking." Delegators (ATOM holders) can choose to delegate their ATOM to validators they trust to manage the staking process and transaction validation on their behalf.
-
The Graph (GRT)
The Graph (GRT) provides an opportunity for GRT token holders to participate (staking) in the network and earn rewards. The Graph allows users to create indexes and query data from various blockchains, including Ethereum and several other blockchains.
-
Polygon (MATIC)
Polygon (MATIC) is a blockchain platform aimed at improving Ethereum's performance and scalability. One of Polygon's main features is its ability to perform asset staking. In the Polygon network, MATIC holders have two main roles: validator and delegator. Validators are entities actively involved in transaction validation and block production in the network. Delegators are MATIC holders who choose to delegate their tokens to specific validators.
-
Near Protocol (NEAR)
One of the key features of the NEAR Protocol is its ability to perform asset staking. The staking process within the NEAR Protocol can be conducted through delegation, where NEAR holders can choose to delegate their tokens to validators they trust to manage the staking process and transaction validation on their behalf.
-
Cardano (ADA)
Cardano (ADA) is a cryptocurrency that operates on the Cardano blockchain network. One of Cardano's main features is its ability to perform asset staking. As a reward for participating in ADA staking, both validators and delegators are entitled to receive rewards. These rewards are typically provided in the form of additional ADA obtained from transaction fees and block incentives generated during the validation process.
-
Polkadot (DOT)
Polkadot (DOT) is a cryptocurrency that operates on the Polkadot blockchain network. One of Polkadot's main features is its ability to perform asset staking. Validators in the Polkadot network are responsible for validating transactions and producing new blocks. They need to set up reliable infrastructure to run nodes and participate in the consensus process. DOT holders can nominate themselves as nominators, entities that choose validators they trust to represent them in the Polkadot network. Nominators support validators by delegating a certain amount of DOT to them.
-
Kusama (KSM)
Kusama is based on a Proof of Stake (PoS) consensus model, similar to Polkadot. This means that transaction validation and block production in the Kusama network are carried out by validators selected based on the amount of KSM tokens they have staked in the network.
Frequently Asked Questions About Crypto Staking
Still have many questions about staking? We've compiled a FAQ that may also answer your questions. Check out the following list!
Is crypto staking worth it?
The main advantage of staking is the potential to increase your cryptocurrency holdings, with interest rates often being quite significant. In several cases, the annual returns can exceed 10% or even 20%, making it a potentially beneficial investment. All that's required is cryptocurrency that operates on the proof-of-stake framework.
Is staking better than holding in crypto?
Holding onto cryptocurrencies, known as HODLing, doesn't increase the quantity of coins you own. Your gains solely depend on cryptocurrency's price movement. On the other hand, staking allows you to potentially accumulate more coins even if the price drops, which could lead to increased overall value. The decision between staking and holding depends on factors such as investment strategy, risk appetite, and the specific characteristics of cryptocurrency being considered.
Is staking crypto safe?
Unlike a savings account or bank deposit, staking your crypto can result in losses. Therefore, there are certain risks associated with staking, including:
-
Smart Contract Risks: Staking involves using smart contracts that may have bugs or vulnerabilities exploitable by attackers.
-
Slashing Risks: Validators in Proof of Stake (PoS) networks may be penalized or slashed for malicious behavior or not meeting network requirements, leading to potential loss of staked funds.
-
Market Risks: The value of the staked cryptocurrency can change, affecting the overall value of staked assets.
-
Centralization Risks: Some staking methods may lead to centralization, where a few validators control much of the network, potentially compromising decentralization and security.
-
Network Risks: Staking requires consistent internet access and proper maintenance of staking nodes, which may be affected by network issues or technical problems.
How much money can you make from staking crypto?
For many cryptocurrencies, the annual percentage yields (APYs) typically fall between 2% and 10%. For instance, on Coinbase Global (NASDAQ: COIN), you can presently earn 3.35% on your Ethereum holdings.
How to Stake on Bitrue?
Let's get to know more how to stake on Bitrue. If you're new to staking, we recommend starting with Power Piggy. It's user-friendly, offering daily interest payments directly into your Bitrue account at 16:00 UTC. Plus, it's risk-free, as there are no lockup periods. You can withdraw your coins anytime to trade on the exchange.
Power Piggy supports over 100 different coins with competitive interest rates, making it hassle-free compared to direct staking. For longer-term investments, consider using our Yield Farming service. While similar to Power Piggy, your coins will be locked for a period, but with higher rewards. Early withdrawal is possible, but no interest will be earned. It's the best way to maximize earnings potential.