If you’re a crypto investor or new to the industry, then you’re going to be hearing the term staking thrown around a lot. Staking is a way participants earn rewards for holding specific cryptocurrencies. Cryptocurrencies use staking as a method of verifying their transactions.

In crypto staking, you dedicate your crypto assets to supporting a blockchain network and confirming transactions. You can only do this with cryptocurrencies that utilize the proof-of-stake model to process payments, unlike the less energy-efficient proof-of-work model, which solves mathematical equations with mining devices with high computing power.

Some cryptocurrencies offer high-interest rates for staking. Therefore it’s a great way to generate passive income with your crypto assets.

What is proof of Stake?

Proof of Stake is a new consensus mechanism based on increasing efficiency and speed while reducing fees. Proof of Stake saves cost because transactions are validated by participants actively invested in the blockchain through staking. This way, mimers are not required to go through an energy-intensive churning through maths problems.

  • Staking functions can be compared to mining in that it’s a process that network users are chosen to put in a new batch of transactions to the blockchain and earn some rewards in exchange.
  • Ultimately, users put their tokens on the line for the opportunity of adding the latest block onto the blockchain in exchange for a reward. Staking their tokens is like proof of the legitimacy of any new transaction they introduce to the blockchain.
  • Also, there are rewards for the most invested participants. Validators are appointed by the network based on the abundance of tokens they staked and the length of time they’ve held it for.
  • Conversely, there’s a penalty for the illicit adding of a new block with invalid transactions. Users were found guilty of experiencing the slashing event where they had a chunk of their Stake burned by the network.

Advantages of Staking Crypto

  • It’s a simple and easy means to generate interest in your cryptocurrency holdings. You could potentially be making 10% or 20% per year.
  • There’s no need for any equipment for staking crypto, unlike mining crypto. You can stake your tokens on exchanges like Coinbase, Kucoin, and Binance.
  • You contribute to maintaining the efficiency and security of the blockchain. These cryptocurrencies depend on holders staking to validate transactions and ensure everything runs smoothly.
  • You can cold Stake – a feature that allows you to stake your cryptocurrencies without being connected to the Internet at all times.
  • Crypto staking, unlike crypto mining, is more eco-friendly. It requires less computational power, thereby decreasing energy consumption. This will be huge for the future of crypto because, as of now, Bitcoin mining consumes more energy than Switzerland.

Disadvantages of Staking Crypto

  • Crypto prices are not stable and could drastically go down. Sometimes the drop could outweigh any interest you earn on them. Hence, you should be wary of cryptocurrencies offering incredibly high rates as their prices may end up crashing.
  • Depending on the cryptocurrency, you’re often required to stake your coin for a minimum amount of time. This means you might not have access to them or be able to trade with them until the designated time elapses.
  • The un-staking period could be frustrating. It could sometimes last up to seven days or more.

Why You Can’t Stake All Cryptocurrencies

Some cryptocurrencies like Bitcoin don’t allow staking. You’re going to need a little bit of background to understand why.

  • Cryptocurrencies are generally decentralized, which is why they use a consensus mechanism. This is how all the computers in a decentralized network without a central authority like a bank would arrive at the correct answer.
  • Many cryptocurrencies like Ethereum 1.0 and Bitcoin make use of a consensus mechanism known as proof of work. Through proof of work, the network can utilize enormous processing power to solve issues like ensuring nobody is trying to spend the same money more than once and validating transactions between strangers anywhere on the planet.
  • Also, there are miners all over the globe constantly competing to be the first to provide solutions to a cryptographic puzzle. The reward is an opportunity to add a new block of verified transactions to the blockchain to get some crypto in return.

Proof of work is a scalable solution to a basic blockchain like Bitcoin, which functions like a bank ledger ( tracking incoming and outgoing transactions). But for a complex blockchain like Ethereum with a wide variety of applications, proof of work falls short. Proof of work could result in bottlenecks when there’s too much traffic. Which consequently leads to higher fees and longer transaction times.

Top Staking Coins

Ethereum

Ethereum is a blockchain-based platform where developers can build dApps (decentralized applications). While it’s true that Ethereum 1.0 is a proof-of-work network, Ethereum 2.0 will, however, switch to a proof-of-stake consensus method.

In anticipation of this, anyone can invest in Ethereum and stake it on the Ethereum 2.0 network. Though, doing this means your investment will be stuck until the 2.0 upgrade launches.

You’d need to stake 32 ETH through an Ethereum 2.0 node to be able to pre-stake on Ethereum 2.0. You could also get In on the action by staking less on exchanges like coinbase. This way, the platform acts as delegates or users you’re funding to help validate new blockchain transactions.

Moonbeam

Moonbeam is a parachain that operates based on Polkadot’s proof-of-stake model, where there are validators and collators. Moonbeam collator staking maintains the parachains by producing blocks and maintaining the network.

Moonbeam serves as a bridge that permits developers and participants to utilize Polkadot and Ethereum. It incorporates the rock-solid tools accessible on polkadots with the robust infrastructure and smart contracts of Ethereum.

Cardano

Cardano’s network runs on its Ouroboros proof-of-stake consensus mechanism that can process hundreds of transactions in a second. Staking Cardano doesn’t come with limitations like Ethereum, which requires participants to wait for a long period before accessing their staked assets. With Cardano, you can pull out your staked assets whenever you’d prefer.

Conclusion

After going through all that had been discussed earlier, you should now have enough information at your disposal to answer the question, ” what is staking in Crypto?”. Also, you should weigh the pros against the cons and decide if Crypto staking is your cup of tea or not.