Guide to Crypto Staking - What It Is and How To Get Started

In crypto, staking has become a popular way to earn a passive income. It is less risky than investing or trading and is relatively easy to do. However, you need to understand what blockchains support staking and its mechanism. You can stake many cryptocurrencies (more on that later) and platforms that offer considerable returns. 

Of course, if you're just starting out in crypto, you want to know the answer to the big questions. What is crypto staking? How do you stake crypto? Is it profitable? Is it risky? How is it different than investing or trading?

This guide will cover all of that to give readers a good understanding of crypto staking. Most people start looking into crypto after dabbling in stocks, commodities, real estate, forex or active trading for a while. But after the 2017 wave, more 'regular Joes' are turning to digital assets than before. With this in mind, most users are priced out of crypto investing and trading since the price of Bitcoin skyrocketed in 2021 but crypto staking remains a viable alternative to earn from.

What is Crypto Staking?

Staking essentially dedicates your crypto assets to a cryptocurrency system to gain incentives in exchange. This is comparable to the profit banks generate from their clients' funds. When consumers deposit money into their accounts, the bank uses it to make loans to other people or businesses and charges interest. Crypto staking works similarly because you 'hand' your crypto assets to an exchange, a staking pool or a protocol. The reason behind allowing staking is to let users participate in securing the network (the blockchain on which the staked cryptocurrency functions) by locking up a set amount of said cryptocurrency. When doing so, users are rewarded for securing the network through the native tokens of the respective blockchain.

Thus, the rewards you receive from staking are proportional to the amount of crypto assets you pledge. These rewards are distributed on-chain, so earning more crypto is completely automatic. Users simply need access to a platform, wallet or blockchain that supports staking. These crypto-assets generate passive income like stocks and other investments once they deposit and lock their assets in their preferred service.

It is worth pointing out that some decentralized exchanges do take one step further and use the staked crypto to allow leveraged trading for users (and making a profit just like banks do). But this is beside the original point of staking, ensuring the network's security for all participants. The core of decentralization that blockchain promises.

Staking only works for cryptocurrencies that use the Proof-of-Stake consensus method. To understand this, let's first see what blockchains are and how they operate.

Proof-of-Stake (PoS) vs. Proof-of-Work (PoW)

In its simplest form, blockchain allows digital information to be distributed rather than copied and reproduced across hundreds of thousands of participants. This forms the backbone of a new type of internet that is entirely decentralized and peer-to-peer.

A network of "nodes" make up the blockchain network where each node is a participant and an "administrator" of the blockchain. These nodes voluntarily join the network (in this sense, it is decentralized). Each one has a reason or "an incentive" for participating in the network in the form of earning cryptocurrency. There are two ways to achieve that based on the consensus algorithm that the network uses.

If the network uses Proof-of-Work (PoW), each "node" mines cryptocurrency, but the term is a misnomer. In fact, each node is competing to win cryptocurrency by solving computational puzzles. Bitcoin is the best example of a PoW model and the original blockchain consensus algorithm. But it also turned out it is incredibly energy-inefficient and cumbersome for participating nodes.

Thus, Proof-of-Stake (PoS) came to be. 

Proof of stake is a consensus protocol allowing participants on a particular network to stake their coins. The protocol then randomly grants the right to validate the next block to one of them at unique intervals. You increase your chance of getting chosen by staking more coins. This brings more fairness to the decentralized nature of blockchain because the people who have the most assets locked up (invested) in the network have the most vested interest in maintaining it and helping it grow. For this, they are, in turn, rewarded with more crypto, creating a fair decentralized economy. 

How to Stake Crypto

There are several ways to stake Proof-of-Stake cryptocurrencies. As you get more comfortable with staking crypto, you can start using several or all of them and find out what yields the best returns. The most popular are:

• Crypto Exchanges: Most major crypto exchanges allow users to stake crypto and earn rewards. The percentages you earn when staking crypto on an exchange are quite attractive but the payout is not without its risks. Most exchanges apply a commission on customers' staking rewards and offer higher payouts on lesser-known coins.
• Liquidity Pools: There are so-called "staking pools" run by other users you can join and lock your crypto to collect incentives. Usually, you can transfer and lock funds for a set amount of time by connecting a crypto wallet to the validator's pool. However, many people have been burnt after joining pools that shut down or turned out to be scams, so be sure to verify the validity of these pools before transferring tokens.
• Staking with a Validator: Validators are blockchain network members responsible for checking transactions to guarantee the network's security. They validate transactions and stake coins. They are compensated with crypto coins but only if they validate a transaction. You can become a validator and obtain staking incentives but the process is more complicated. Users need a significant amount of coins to become a validator (for example, validators on the Ethereum networks must stake a minimum of 32 ETH) although recently new services allow users to join validator pools for a fraction of the full amount they need to stake on their own.
• Staking-as-a-service: Staking-as-a-Service (StaaS) is the newest form of staking crypto. It came to be as a solution geared towards less tech-savvy users who want to participate in staking but lack the technical knowledge or resources to do so independently. With StaaS, users can delegate their staking responsibilities to specialized service providers who handle the technical aspects on their behalf. This accessibility lowers the entry barrier and allows more people to participate in staking and earn rewards from their cryptocurrency holdings.

What are the Advantages of Staking

Staking has several benefits that are hard to overlook. It increases your chances of becoming the validator for the next block on the network and earning more. But the Proof of Stake model also helps save a lot of money. You don't have to buy expensive mining hardware and cooling equipment and pay high electricity bills.

Given the vast number of PoS cryptocurrencies, many options exist for staking crypto with different ROIs. Proof of Stake networks has their own staking currencies. Staking crypto allows users to contribute to increased scalability and security of the network directly. You can use as many pools, exchanges or validators as possible when staking crypto.

Popular Cryptocurrencies for Staking

As previously mentioned, not all cryptocurrencies offer staking. Only those operating on top of a blockchain that uses the PoS consensus algorithm to validate transactions. Some popular PoS cryptocurrencies you can invest in are:

• Ethereum (ETH) was the first cryptocurrency to provide a programmable blockchain for developers to create decentralized applications. Interestingly, Ethereum initially used proof of work, but announced an upgrade in 2021 that saw it transition to a proof-of-stake model.
• Cardano (ADA) is an environmentally friendly cryptocurrency. It began as peer-reviewed research and progressed through evidence-based procedures.
• Polkadot (DOT) is a protocol that links different blockchains, allowing them to interact and collaborate.
• Solana (SOL) is a blockchain designed for scalability and is considered to give Ethereum a run for its reputation because it offers similar functionality with significant improvements. Namely, faster and cheaper transactions and ample Dapp development capacity. 

You can stake many other cryptocurrencies. Find out more about best staking crypto

What is Cold Staking

There is a fourth option if you don't feel like you can entrust your hard-earned crypto with another party but still want to stake it. It's called cold staking and requires a cold or hardware wallet. This is a USB device you store your crypto on to ensure no one can hack your computer and steal it. It is called a cold wallet because it doesn't connect to the Internet. Most networks support crypto staking in cold storage or use a software wallet. Cold staking is the most secure method of storing funds. And that is hard to beat.

You basically get all the benefits of staking crypto but none of the risks. However, you will lose your rewards if you take the crypto out of the cold wallet. But as long as it stays there, you will keep on receiving a string of passive income.

Is Staking Crypto Profitable?

Several factors determine the profitability of staking crypto.  depends on various factors, From the specific cryptocurrency being staked, to the use cases of the PoS blockchain it uses, the staking rewards structure, and the overall market conditions – all of these affect the expected return. 

In general, staking can be a profitable endeavor. By staking their cryptocurrencies, individuals can earn passively in the form of staking rewards. These rewards are typically distributed in proportion to the amount of tokens staked, incentivizing participants to engage in the network and support its operations actively. However, it's important to note that staking rewards can vary significantly between different cryptocurrencies and networks. 

Additionally, market fluctuations and changes in staking parameters can impact the profitability of staking. Therefore, it is crucial for participants to carefully consider the potential rewards, associated risks, and market conditions before engaging in staking activities.

A Final Word

It's fair to say that staking crypto is a more popular way of getting into a segment many views as overly technical and complicated. While staking can't compete with trading crypto regarding potential returns, it is considerably safer and easier for the everyday crypto user. Think of staking as halfway between the domain of digital assets and the good, old-fashioned savings account at a bank. The funds are locked for a set amount of time, they generate consistent yields, and if you withdraw them earlier – you lose the accumulated interest (or rewards, in this case).

Staking crypto creates more opportunities for anyone who wants to participate in the blockchain phenomenon and profit while doing it. Not to mention - an easy way to earn passive income by doing nothing more than holding cryptocurrency.