Staking offers crypto investors a way of using their digital assets to earn passive income without selling their crypto holdings.
Cryptocurrency staking is similar to investing in a high-yielding savings account. When you deposit money into a savings account, the financial institution takes that money and usually lends it out to others. You lock up your money with the bank, and they give you a small percentage of the interest earned on that money.
When you stake your digital assets, you lock them up to participate in the blockchain and maintain its security. In exchange for that, you earn rewards calculated in percentage yields. These returns are usually much higher than any interest rates offered by banks.
The crypto staking process has become a popular way to make a passive income from crypto assets without trading them. According to Staking Reward’s estimates, as of April 2022, the total value of cryptocurrencies held by stakes exceeded the $280 billion mark.
How Does Staking Work?
Proof-of-stake is a method used to select honest participants and validate new data blocks being entered into the stake blockchain.
Requiring these network participants to purchase and lock away tokens, makes acting dishonestly in the network unattractive. If the blockchain were corrupted through malicious activity, the token attached to it would likely plummet in value, and the perpetrators would lose money if they invested in the currency.
The stake model is the validator‘s incentive to ensure honesty. Validators who commit to the network receive rewards in the native currency. The bigger their stake in the network, the higher chance they will propose a new block and receive crypto rewards. After all, the bigger your stake, the more likely you will be an honest player for the block rewards.
Based on staking requirements a stake doesn’t have to be composed entirely of one person’s coins. Validators run a staking pool, meaning they collect fees from users who stake their tokens. Anyone can participate in the stacking process by delegating their stake coins to stake pool operators who do the heavy lifting of verifying transactions on the blockchain.
Validators can be punished if they commit minor breaches like going offline for extended periods and can be suspended and have their funds removed from the consensus process. This is called “slashing’ and, although rare, has happened across multiple blockchains.
Each blockchain has its own set of rules for validators. For example, the Tera Network capped the maximum number of validators at 130. Proof-of-stake requires each validator to hold at least 32 ETH, which is worth more than $100,000.
How Do I Start Staking?
Anyone can stake their coins as token holders. Becoming a full validator can require substantial investments. It may require technical knowledge and a dedicated computer that performs validations without downtime on a daily basis. Participating at this level comes with security concerns and is a serious obligation because downtime can cause a validator’s stake to be slashed.
For most people, there’s a much easier way to participate. You can contribute an amount you’re comfortable with to a staking pool through a cryptocurrency exchange. This makes it easier for investors to get started and earn rewards without operating validator hardware.
