What is staking?
Staking in crypto refers to the process of holding or locking up cryptocurrency in a wallet to support the operations of a blockchain network and earn rewards. However, not all cryptocurrencies allow it. Currencies like Ethereum, Solana, Cardano, etc. that use the Proof-of-Stake (PoS) consensus mechanism allow an individual to stake.
Understanding staking in layman’s terms
The basics of staking in blockchain are quite similar to depositing your assets in your bank account except that the technicalities may vary.
In a centralized system (for example, banks), your savings and assets get minimal returns based on an interest rate. Now, returns on your assets in a bank account are very less compared to the ones you get when you stake cryptocurrencies.
However, the risks involved in saving your assets in a centralized system and staking a cryptocurrency are more or less the same. These risks may vary from market to liquidity to loss of assets. But, inherently, to stake crypto is safe, recommended, and appreciated.
How staking works
Staking works only with cryptocurrencies that use a Proof-of-Stake (PoS) consensus mechanism. An important concept to understand in this is that of validators who are individuals responsible for verifying transactions. You may read the linked article to get a detailed understanding of validators.
Validators mostly verify those transactions that are done on a blockchain that follows a PoS consensus mechanism. These are individuals who have a stake of their own in a blockchain. Staking is a game of honesty. The bigger your stake in a cryptocurrency, the more responsibility you have and the more honesty you are to show.
A validator essentially verifies transactions done on a blockchain. The more coins you have staked meaning locked in a wallet, the more returns you get. If you have a lot at stake, you can also propose a whole block in a blockchain.
There are, on average, 2000 transactions on a block. Validators get a certain fee on each transaction. This fee is dependent on market conditions and network protocols. But proposing a block can earn you good money.
How to start staking?
- First, look up the websites of currencies that allow staking. Read their protocols, expert reviews, and what they predict and see whether it is a suitable time (from the perspective of the market) to invest in the chosen currency.
- Look up different methods such as staking pools and delegating and see which one suits you better.
- Select a website that you would like to assist you to stake your cryptocurrency. Doing it on Coinbase, Binance, and other websites allows you to make transactions and stake your currency as well. There are also websites that only provide staking services.
- Once your staking method, currency, and website have been decided, make sure that you follow the instructions diligently and carefully and keep a check on the rewards that you will earn through it.
How much must you stake to propose a block?
Now, that’s a really good question! So, how much one needs to stake in order to propose a block actually varies from blockchain to blockchain. Each blockchain that supports staking has a set of protocols that are to be followed.
Thus, some blockchains might have a minimum amount of coins required to enter as a validator while some might use weighted proportional stake-weighted block proposals – the act of submitting a block of transactions to network validators for approval.
The easiest way to go about it is to look up the protocols of those PoS blockchains that support staking. With a thorough understanding of the protocols a blockchain follows, you can make better and more informed decisions.
It is, however, important to note that this is a game of patience along with integrity and honesty. Your crypto assets must stay in a place for a certain period of time in order for you to become a validator.
Benefits of staking
There are multiple benefits of staking and they are as follows:
1. Long-term investment gives big returns
Staking means having to hold your currency for a prolonged period of time. And as good things take time, bigger benefits also take time.
2. Staking is not just storing
Staking is not just storing your cryptocurrency. It is something that compounds your cryptocurrency over a period of time along with other benefits such as contributing in decision-making of a network and rewards.
3. You have a say
In staking, you have a say in things. By putting a cryptocurrency on stake, you acquire some authority. Based on the common good of the users, you can give valuable feedback and become a part of the decision-making process within the network.
4. Network security
By staking, you also contribute to the security of a network because when you stake some percentage of a cryptocurrency bought from your hard-earned money, you would not want to lose it because of substandard security measures.
Risks of staking
The risks associated with staking are not because it is bad. Different factors such as the market can interfere with the process of staking. We have broken down some risks for you.
1. Holding your currency for a certain amount of time
Staking requires you to hold your currency for some time. If in some rare circumstances, you have to withdraw your currency, your streak will be lost and you won’t be able to become a validator because in order to withdraw, you will have to unstack which means withdrawing or releasing previously locked-up cryptocurrency from a staking contract or wallet, making it available for immediate use or transfer.
2. Do not break the rules
Protocols for staking vary from blockchain to blockchain. If you happen to defy some rules, you can be on the verge of losing some or all of your currency.
3. The market decides
While the market can lead to higher returns on your investment, the fluctuations in the market can also lead to losses, which is a downside. Thus, the market crashing down is perhaps the biggest risk you will face in staking.
All in all, many long-term cryptocurrency owners view staking as a means to put their holdings to use by producing rewards rather than letting them sit dormant in their wallets. As a phenomenon, it helps the blockchain projects, that you support, by enhancing their effectiveness and security. You can increase a blockchain’s security and transaction processing capacity by staking some of your funds.