Staking as the base for cryptocurrencies. Is it a good way of investing? What are its benefits and disadvantages?

Staking is a method of validating transactions made using cryptocurrency. It’s also how you can effectively earn digital money. Read this article to find out what is staking in cryptocurrency.
staking

Broadly speaking, crypto staking is earning and storing a certain amount of tokens. They can be used to validate transactions made through the chain of blocks. Staking (Proof of Stake) is a method of validating transactions. It appeared as a new trend, following the growing need for computing power which is necessary to validate blocks using the Proof of Work (PoW) consensus algorithm. PoW is the foundation of the bitcoin (BTC) network and many other cryptocurrencies. Many energy-consuming devices must be engaged in order to maintain the network.

What is staking crypto? Can it earn you a profit?

The Proof of Stake consensus algorithm (PoS) is much more energy-efficient than PoW. Why? It removes or at least significantly reduces the need for multiple mining devices to secure the blockchain. Many blockchains (such as Ethereum) already switched to staking crypto. Others plan to do so in the near future. This is caused by the growing costs of the cryptocurrency network functioning. Further on in this article, we will talk about what is staking crypto in more detail.

What does staking mean in crypto?

The method of validating transactions in blockchains which we are discussing here is based on buying and storing certain token quantities. This transforms your wallet into an active validation node which can be used to confirm transactions in a certain network. Locking these coins makes you the owner of an important element of infrastructure needed to secure a network. You receive an adequate reward for this. Consequently, staking has two functions: it enables the cryptocurrency to function and makes a profit for its users.

Staking crypto rewards and types

The staking reward is paid to the user in the form of interest calculated from a certain locked number of tokens. The reward depends on many different aspects, varying amongst the networks (e.g., because of the uneven supply and demand). Since there are growing numbers of cryptocurrencies based on PoS, there are also new ways of crypto staking, e.g.:

  • staking in pools (known also as group stacking);
  • fixed staking;
  • offline staking.

These initiatives grant individual investors the possibility of staking. Those users usually don’t have large quantities of any cryptocurrency.

Staking – meaning and types

The staking process begins at the moment of buying a certain cryptocurrency amount. Most importantly, you have to remember to invest in coins which are based on a PoS algorithm network. You can only stake in these types of networks. After buying tokens, you will have to lock them, as described by the creators of the given cryptocurrency. This operation usually doesn’t take more than a couple of minutes. You will need the instructions which you receive after installing the wallet for your chosen currency.

Crypto staking in pools – is it profitable?

Many cryptocurrency exchanges enable their users staking by providing the opportunity of group crypto staking in pools. This method is supposed to increase the profit earned from blocking tokens in a network. The more coins you have to stake, the bigger the profit.

The more locked tokens, the more transactions are sent to a node for validation. Usually, validator roles get assigned hierarchically to nodes, based on how many coins they have. Consequently, the nodes with the most cryptocurrency get the biggest rewards. This is the main reason for the popularity of staking in pools.

What is fixed staking?

Another method of staking is locking tokens for a certain time, without the possibility of withdrawing funds prematurely. This process of cryptocurrency block validation is called fixed staking. This allows you to earn quite large rewards. The reason for this is the pre-planned duration period of cryptocurrency storing.

Flexible crypto staking

There are also staking platforms which provide the option of locking coins in a more comfortable way. The method of flexible staking means that anyone can withdraw their locked funds at any given time. However, this also means smaller rewards than when using fixed staking.

What is staking in cryptocurrency in terms of the risks and profits?

The popularity of staking digital tokens keeps growing because the rewards for locking coins are pretty large. Currently, you can earn up to 6% annual interest. This is possible within renowned networks, for example:

  • Ethereum (ETH);
  • Cardano (ADA);
  • Binance Coin (BNB).

Less popular platforms offer an even higher staking interest rate. Some of them allow you to earn up to a couple dozen percent interest from storing coins in your wallet. Some of them are:

  • PancakeSwap (CAKE);
  • Kava (KAVA);
  • Shiba Inu (SHIB).

Does staking crypto come with a risk?

Of course, these high rewards from crypto staking come with a risk. There are many various aspects which influence the value and safety of staking tokens.

Cybersecurity and the risk of losing coins

The first thing you have to worry about is cybersecurity which might interfere with your locked coins profit or online wallet. To avoid this risk, many investors choose offline staking. Cryptocurrencies are stored in your wallet installed on a device without Internet access. It’s certainly a good way to protect your digital tokens. In this case, your only risk is connected to potential hardware damage. You can counteract this by making a backup copy.

The risk of losing some of the invested funds

Secondly, staking is connected to the risk of drops in the stock exchange valuation of assets during the locking period. In the case of fixed staking, this can be a serious problem, because you can’t withdraw and sell your coins even when their rate drops. It’s hard to avoid large losses. This may mean losing part of your invested funds.

The risk of validation node disturbance

Thirdly, staking comes with the risk that the validating node you are using might crash. This might happen, even though the cryptocurrency networks include penalty mechanisms for pauses in processing transactions. Unfortunately, these disruptions may lower your reward from staking crypto.

What cryptocurrency is staking best for?

Now that you can define staking, you should also find out for which coins it is most profitable. If you’re looking for the best tokens to block for financial purposes, you shouldn’t focus all your attention on the rewards a network pays out. You should also consider a couple other aspects, such as the lock time and the coin liquidity.

Low-cap cryptocurrencies tend to reward staking higher than well-established coins, such as Ethereum (ETH). This is due to the need for a bigger demand. Larger rewards may seem more tempting. However, staking less renowned cryptocurrencies comes with the risk of a difficulty in selling such coins. This is because of their low liquidity, i.e. their small daily trading volume.

Smaller but surer profit

As we have mentioned before, staking assets which require long locking times may cause losses in your total capital. This can happen when the exchange rate of a coin drops when you’re not able to sell it.

If you consider the current situation of low interest rates, the prospect of gaining even a few percent of annual interest from crypto staking seems very attractive. As we have mentioned before, some of the renowned cryptocurrencies offer rewards in Ethereum (ETH) or polkadot (DOT) – but that’s not all.

The cryptocurrencies you should consider staking

There are other coins which offer even larger rewards. They may be less popular than top ranking tokens – which doesn’t mean that their trading volume prevents sales and earning a profit. Some of such tokens are:

  • Algorand (ALGO);
  • Polygon (MATIC);
  • Kusama (KSM);
  • Solana (SOL).

Summary

You should have a good idea of what is staking crypto. You also know how this form of investing works and why it’s so popular. Let’s sum up all you have learned.

Locking tokens has become an interesting way to earn cryptocurrency. At the same time, it allows you to support the creators of your favourite coins. Staking works similarly to buying shares with a very attractive dividend. These attractive return rates have driven billions of dollars into the cryptocurrency market. Another aspect which is in favour of PoS is its energy efficiency.Staking also has some flaws – mainly connected to investment risks. Before you allocate large sums of money to staking, you should calculate the possible earnings and loss risks. Consider not just the reward, but also the technical reliability of a certain network and the current market conditions.

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