Staking: Everything to Know
By Beluga Research July 5, 2023
- Staking is a process that allows investors to earn rewards
- This process involves an investor putting up a "stake" of cryptocurrency
- As a result, the investor is actually participating in the network's consensus process called proof-of-stake (PoS)
- In PoS, staking participation allows investors to help validate the transactions that occur on the network
Staking is a way for investors to earn passive income in the crypto world. Staking involves holding a certain number of coins in a wallet or smart contract. The investor uses these to validate transactions on the network. In return, the investor receives rewards in the form of additional cryptocurrency.
Staking has become increasingly popular in recent years. It is more environmentally friendly than the alternative consensus method, proof-of-work (PoW), which is what Bitccoin uses. This is because staking requires less energy to validate transactions. Staking also offers the advantage of allowing investors to earn passive income without having to worry about the volatility of the crypto market. An investor who stakes coins earns rewards regardless of how the market performs.
A Brief History
Staking has its roots in the early days of the crypto industry. The first cryptocurrency to use a PoS consensus mechanism was Peercoin, which was launched in 2012. Peercoin was designed to be a more energy-efficient alternative to Bitcoin. Since 2012, many other cryptocurrencies have adopted PoS, including Ethereum, Cardano and Binance Coin among many others.
What is Staking?
Staking is a process that enables investors to earn rewards in the form of more crypto. Investors accomplish this goal by "staking" coins in a crypto wallet or smart contract. The more coins an investor holds, the more likely they are to be chosen as a validator.
In PoS, a network consensus process, a validator has the responsibility of validating transactions on the network and adding transactions to the blockchain.
The process of validation involves using crypto to stake a claim on a block of transactions. If the block is validated, the validator earns a reward in the form of more coins. Staking rewards can vary between different blockchain networks. The amount that a staker can earn typically ranges between 5% and 20% per year.
- Select a wallet from which to stake crypto. The wallet needs to support the staking of cryptocurrency. Many wallets, such as Exodus and Coinbase, allow users to stake their cryptocurrency.
- Select a cryptocurrency to stake. It is important to research the different cryptocurrencies available for staking. An investor should choose a cryptocurrency that aligns with specific investment goals. Some cryptocurrencies offer higher staking rewards than others. These cryptocurrencies usually come with higher risks.
- Decide how much to stake. The amount staked will determine the amount of rewards received. Some cryptocurrencies have minimum staking requirements. An investor should check these requirements before staking. Wait for the staking period to end to claim rewards. The staking period can vary depending on the cryptocurrency. It typically ranges from a few days to several months. During the staking period, the cryptocurrency will be locked in the investor's wallet. They will not be able to use it for other purposes.
- Users earn passive income while supporting the network. Staking rewards are typically higher than the rewards for traditional savings accounts. This makes them attractive for those looking to earn additional income. Staking can help increase the security and stability of the network. When investors stake cryptocurrency, it helps to secure a cryptocurrency network. This is because it is added to the network's overall stake. When a network has more value, it is harder for bad actors to attack the network and compromise its security.
- Potential for slashing. Slashing occurs when a validator fails to follow the network's rules. The validator is penalized by having a portion of their staked cryptocurrency confiscated. The penalty is designed to deter bad actors and encourage all parties to follow the rules. Slashing can occur due to technical issues. It is essential to choose reliable validators and keep up with updates and changes to the network.
- Passive Income. Staking allows users to earn passive income on cryptocurrency holdings. This is because the action allows for participation in the network's validation process.
- Lower Energy Consumption. Unlike mining, staking does not require high computational power. This makes staking a more energy-efficient process than mining.
- Lower Entry Barrier. Staking requires less technical expertise and hardware investment than mining. This makes the practice more accessible to a wider audience.
- Increased Security. Staking helps to increase the network's security. It ensures that a certain percentage of cryptocurrency is locked up as collateral.
- Network Governance. Staking allows users to participate in the network's governance. It allows users to vote on proposals and possible changes to a cryptocurrency network's protocol.
- Lower Volatility Risk. Staking helps to reduce the volatility risk of a cryptocurrency. It incentivizes users to hold onto crypto for a longer period of time. It discourages investors from selling coins in the short-term.
- Slashing. Staking comes with the risk of "slashing," the penalty for bad behavior. Bad behavior can include attacking the network and double-spending. When a slashing occurs, a user deemed to be at fault can lose a portion of staked coins.
- Centralization. Staking can lead to centralization. Larger holders of a cryptocurrency typically have more influence over the network's governance and decision-making.
- Lock-Up Period. Staking often requires users to lock up cryptocurrency holdings for a certain period. This can limit liquidity and flexibility for users who may need to access their funds in the short term.
- Technical Risk. Staking requires users to have a certain level of technical knowledge. The users must also have an understanding of the network's protocol to participate effectively. Users who are not familiar with technical details about the process can make mistakes that will result in the loss of their staked coins.