In the traditional financial world, your money often sits in a savings account, earning a tiny bit of interest while the bank lends it out. In the world of blockchain, staking is the crypto-equivalent of that savings account.
But instead of a bank using your money, the blockchain network uses your “staked” assets to verify transactions and maintain security. In exchange for this service, you get paid. Your complete guide to understanding what is staking crypto starts here. By the end of this article, you’ll know exactly how to put your digital assets to work.
What Does Staking Crypto Mean?
At its core, what does staking crypto mean? Staking crypto simply means locking up your cryptocurrency in a blockchain network to help keep it running. In return, you earn rewards.
Think of it like putting money in a fixed deposit account. You commit your funds for a period of time, and in exchange, you earn interest. In crypto, those earnings are called crypto staking rewards.
When you stake your coins, you’re helping the network validate transactions, maintain security, and keep the blockchain decentralized. And for doing that, the network pays you.
Proof of Work (PoW) vs. Proof of Stake (PoS)
PoW vs PoS. Image Credit: BitPay
To fully understand what is staking crypto, you need to know the difference between the two major systems blockchains work on: Proof of Work (PoW) and Proof of Stake (PoS).
- Proof of Work (PoW): This is the one that the first cryptocurrencies such as Bitcoin employ. It involves the use of powerful computers to solve complex maths problems. This is referred to as mining. To verify transactions in a blockchain, miners solve tasks to compete to verify transactions. PoW is being abandoned by cryptocurrencies since it uses a significant amount of electricity.
- Proof of Stake (PoS): It has been developed to address the issues of PoW. This model doesn’t require mining. Rather, to ensure that the blockchain is secure and checks transactions, the validators are elected based on the quantity of crypto they stake. PoS is more efficient and quicker compared to PoW.
Simply stated, PoW is a mining process, where you get a reward by using a machine, whereas PoS is a staking process, where you get a reward by using your coins.
How Does Crypto Staking Work?
If you’re wondering how does crypto staking work in a practical sense, it’s helpful to think of it as a fixed deposit account. The coins you stake represent the money you deposit into your bank. Here’s a step-by-step breakdown:
- First, you’ll need to buy a cryptocurrency that you can stake. Only PoS cryptocurrencies like Ethereum, Solana, Cardano, and a long list of others can be staked.
- You choose a staking method (just like choosing the bank where you’ll deposit your funds). You can either stake through an exchange, wallet, or staking pool.
- Next, you choose how long you want your crypto to be locked in the fixed deposit. Your coins are committed to the network for a certain period.
- The network selects validators. These validators confirm transactions and secure the blockchain.
- In return, you receive regular payouts—this is your crypto staking rewards.
Types of Staking: Staking Pools vs. Liquid Staking
In crypto staking, you don’t always need to run your own validator. Because running a validator can be expensive, most people simply delegate their coins to someone who already has one. So, let’s consider the most popular types of staking.
Image Credit: BitBuy
Staking Pools: This is the most common method for beginners. You join forces with thousands of other users to pool your coins together. A pool operator handles the technical work, and the rewards are split proportionally among participants.
What is liquid staking crypto? Traditionally, when you stake, your coins are “locked” and cannot be moved or sold. Liquid staking solves this by giving you a “receipt token” (like stETH) that represents your staked assets. You can trade, sell, or use this receipt token in other DeFi applications while your original coins continue to earn rewards.
Platforms like Coinbase or Binance will also allow you to stake with one click. They take a small cut of your rewards in exchange for making the process incredibly easy.
What is APY in Crypto Staking?
If you’ve browsed a list of coins on exchanges, you will see a percentage labeled “APY.” So, what is apy in crypto staking? APY stands for Annual Percentage Yield. It represents the real rate of return on your staked assets over one year, when compounded.
Unlike the simple interest rate, APY assumes that you take your rewards and “re-stake” them, allowing your earnings to generate their own earnings. Typical staking APYs range from 3% to 15%. However, there are some newer projects that offer much higher (though riskier) APYs.
Is Staking Crypto Worth It? (Pros & Risks)
Before locking up your savings in staking, you must ask: Is staking crypto worth it? For many, the answer is yes. However, it’s mostly not the whole story. To give you an idea of everything to expect, let’s look at the pros and risks of staking crypto.
Pros
- Passive Income: When staking crypto, you earn rewards without actively trading.
- Low Barrier to Entry: Unlike mining, you do not need expensive hardware to begin staking.
- Supports Blockchain Networks: You’re contributing to decentralization.
- Compounding Growth: Reinvesting rewards can boost returns over time.
Cons
- Price Volatility: Because crypto is volatile, the price of your stake coin and rewards can reduce in value.
- Lock-up Periods: Some platforms restrict withdrawals for days or weeks.
- Slashing Risk: Slashing happens when a validator acts maliciously. As a result, a portion of the staked funds can be lost.
- Platform Risk: Using unreliable platforms can expose you to hacks or loss of funds.
For many, after considering the pros and risks of staking crypto, they decide it is worth it. The risks of slashing and platform loss are greatly reduced when you stake crypto on the best crypto staking platform.
How to Stake Crypto & Popular Platforms
Ready to get started? The following is a roadmap to your first stake:
Select Your Asset: Ethereum (ETH), Solana (SOL), Cardano (ADA) and Polkadot (DOT) are popular PoS coins.
Choose An Exchange: For newbies, choose a well-known exchange. Binance or Kraken is deemed to be the easiest to use crypto staking platform. Intermediate users can use a software wallet, such as Phantom (with Solana) or MetaMask (with Ethereum). In case of Maximum Security, use a hardware wallet such as Ledger.
Source: Binance
Go to Earn: Tap on the Binance homepage, then tap “More” > Earn > Staking” or Simple Earn.
Source: Binance
Select Asset and Term: Select the coin you wish to stake and select either Flexible or Locked terms.
Source: Binance
Confirm Subscription: Enter the amount, review the APY (Annual Percentage Yield), and hit the Confirm button, and you will start earning rewards. You have just staked your first crypto.
Conclusion: Should You Stake Your Crypto?
The question of “should I stake my crypto?” depends on your timeline. If you are going to hold for a long time (months or years), then staking is almost a no-brainer. It’s essentially free money without doing any active trading.
However, if you are a day trader who needs instant access to your funds, the lock-up periods might be a dealbreaker. In all, staking isn’t a get-rich-quick scheme. But if done right, it can be a steady way to grow your portfolio over time.
Always do your own research on every coin and platform you want to stake. Importantly, start small to understand the process.
FAQs About Crypto Staking
What is staking crypto in simple terms?
Staking crypto is similar to investing in a savings account with high interest. Except that you are assisting a blockchain network in checking transactions and getting paid back in the form of rewards.
What is the risk of staking crypto if the market crashes?
The greatest hazard is the unbounding period. In case of a market downturn and you wish to sell, then you may have between 7 and 21 days to unlock your coins before the market price may continue to depreciate.
What is slashing in crypto staking?
Slashing is a penalty in which the network removes part of the staked coins of a validator due to reasons of dishonesty or not remaining connected to the network.
Should I stake my crypto on an exchange or a private wallet?
Exchanges are simpler but centralized. Private wallet staking can be more rewarding and offers self-custody assets.
What is liquid staking crypto, and why is it popular?
It is popular in that it eliminates the problem of lock-up. It provides you with a token, representing your stake, which you can use or sell as long as the original asset remains staked.
