Have you ever considered Bitcoin mining but felt it was too expensive and complicated to set up? Then we’ve got good news for you: other blockchains allow you to “mine” their native cryptocurrency without the trouble of setting up a rig. It’s called staking, and it provides passive income in crypto.
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In a nutshell: What is staking?
Staking is a feature of all the blockchains that use the Proof-of-Stake (PoS) consensus protocol. This protocol consists of holding a given amount of coins locked in your wallet (meaning you can’t move them) to validate the network blocks. Staking provides legitimacy to the blockchain operations and contributes to its functioning and operability. In return, stakers receive a reward.
In Bitcoin, miners validate blocks by solving mathematical problems through their mining rigs, which cost money to acquire and build and have high maintenance and power costs. For staking, you need only to hold a certain amount of the crypto you want to stake and lock them in your wallet. The quantity of coins and which wallet to use varies with each blockchain.
Staking is becoming more popular with each passing day, to the point that Ethereum is planning to migrate from Proof-of-Work (mining) to PoS. It’s a very much expected update since most people believe it will help with its high fees.
Other blockchains that use PoS are Cardano (ADA), Solana (SOL) and Cosmos (ATOM), among others. Keep an eye on prices and market capitalization of all these cryptos (and many more) using The Crypto App. Download the app here.
How does the staking process work?
In the PoS consensus protocol, we call each user that stakes their coins (node) a validator. That is because, as the word states, they validate every interaction of other users with the blockchain, whether it’s transactions or smart contract calls.
But how does the protocol pick its validators? The answer is simple: at random. However, there is a twist: those with more coins staked have bigger chances to get selected.
Think about the lottery: The numbers drawn are random, but the more tickets you buy, the bigger your chances of winning. Staking works just like that: the more coins you stake, the more possibilities the protocol will pick you to validate a transaction.
Thus, the system encourages users to lock more assets in their wallets to earn better rewards. That guarantees a functioning validation method while reducing selling pressure, helping stabilize the price.
Pros and cons of staking
Just like any other consensus protocol, Proof-of-Stake has both its advantages and its drawbacks. Let’s jump into each one of them.
On the bright side, PoS is obviously more user-friendly and comfortable than mining. You don’t need to acquire expensive hardware equipment nor set it up, saving a good amount of money and space. To stake, you need only a wallet and some crypto to start earning immediately.
Staking is also more flexible and agile. Although it depends on the blockchain, in most cases, you can stop and resume staking whenever you want. All you have to do is click a button. So if you think you’ve made a good profit and want to cash out, you can do it almost instantly. You don’t have to worry about finding a buyer for your hardware, which in turn loses its value over time.
On the other hand, simplicity comes at a price: rewards tend to be low compared to mining and other investments. Of course, crypto appreciation could make up for this, but then again, it couldn’t.
Another significant disadvantage of staking is that it can become too centralized: Taking into account that people with the higher amount of coins staked have better chances to earn the rewards for a validated block, small investors will always run from behind. Not only that but at some point, it could become irreversible, as is the case of a 51% attack.
As we always say, remember to do your own research. Read all you can about the coin you are willing to stake and the wallet or platform through which you’ll do it.
Also, always try to calculate the rewards you’ll get based on the stated APY to avoid surprises or futile investments. And most importantly, bet on a cryptocurrency that has come to stay. 10% APY on a staked crypto is worth nothing if that crypto drops 30%.
Staking is a great way to earn passive income on your crypto while contributing to a project you believe in, but it comes not without risk. So take all this advice into account when you finally set yourself to validate.