Digital currencies are now one of the most widely used currencies in the world and are increasingly being used over other online transactions. What makes them so popular is the fact that they’re highly secure, the fees are often very low, and there is potential to make a profit. One way of making such a profit is by crypto staking, but here’s the best part, this is a form of passive income.
What Is Staking and How Does It Work?
To understand how crypto staking is and how it works, you have to know what a blockchain is. These are essentially databases that securely store electronic information with the goal of allowing info to be shared but not edited. Blockchains are formed in blocks (in a chain, if you can believe it!), which are created when new data comes in – these are the foundations of the crypto world.
So, when you stake your crypto, you are basically ‘locking it in’ for a set amount of time to help the blockchain operate. This also ensures that the stakers (also known as validators) act honestly; otherwise, they risk corrupting their own stakes and could lose money. In return, stakers can earn rewards based on how much crypto they stake.
How Do I Get Started?
You’ll need to already own or move digital assets to a platform that allows staking. Knowing which staking platform to use depends on the features you’re looking for – perhaps you’re looking for something easy for beginners, something secure, or one with the best rewards. But the only platforms you can use are cryptocurrencies with blockchains that use the proof of stake consensus mechanism, which we’ll discuss later. These platforms include:
- Uphold
- OKX
- Binance
- Coinbase
Any assets you stake remain in your possession, so you can still withdraw them but bear in mind that there may be a wait time.
Proof Of Stake (POS)
The reason you can only stake using certain platforms is because of a census mechanism known as proof of stake, which is only available on specific platforms. This is a way to process new transactions to create new blocks on a blockchain; without this tool, the validation process can’t take place, which would otherwise cause corrupt stakes.
So basically, POS keeps blockchains safe from attack, and it reduces congestion in the network. Validators are selected randomly to confirm transactions and will be rewarded for participating.
The Rewards
Staking is a good option as part of your long-term investment plan. You’ll usually be rewarded at some point with a percentage return of staked cryptocurrency. You can then use this to stake more, trade for cash or other cryptocurrencies, or hold it as an investment. This is a great source of passive income which means you can continue to earn money after it’s all set up (in some cases) without having to invest any more time to maintain it.
It should be noted that fees can affect the rewards. Although the fees are often less than more traditional currency platforms, they can still affect your overall percentage yield.
Why Is It Important?
From an individual’s point of view, this it’s in helping you manage your finances by creating a new source of income. The future could very well be based completely on digital currencies, so getting a head start and keeping your knowledge up-to-date could put you at an advantage financially.
Advantages
Easily Accessible
Anybody with a phone or laptop with an internet connection can get involved with crypto staking. This can create financial freedom for people who wouldn’t have been able to before, such as in countries with unreliable governments.
It’s Decentralised
Decentralised finance relies on a network of individuals instead of one organisation or individual. This has many advantages in itself, but mainly it means people aren’t limited and censored in what they can do, allowing them to be fully in control of their own assets.
It’s Safe
Due to how the crypto world is built (using blockchains), it means you can securely purchase, store and move cryptocurrencies. By staking in blockchains you support, you’re continually adding to their security and efficiency.
Loyalty is Rewarded
Validators often earn based on how long and how many stakes they have. So the more time you put in, the more you will be rewarded.
Risks
It is vital to understand that crypto staking should not be your only form of investing because of how erratic it is. Diversifying your investments is crucial in spreading the risk of investing, which can keep your money safe.
Vesting Period
This is when your crypto stakes are frozen and can’t be transferred for a set period of time. Even if prices drop, your tokens can’t be transferred. Usually, this is only for a few weeks, but this would not be suitable for someone who is trying to make a quick buck.
Penalties
If you misuse a platform, then you could be at risk of ‘slashing’. Slashing is designed to discourage malicious behaviour, even if you didn’t mean to do something. An example of this is inactivity – simply not engaging on the platform for a period of time could mean you lose some of your stakes.
Another behaviour that could be penalised is what is known as double signing. This is when the validator submits two signed messages to the same block, which causes the network to take longer to reach a consensus. This often happens if the validator has optimised their node configuration by having another running at the same time.
Slashing can come in the form of losing your crypto stakes, you can no longer earn rewards, and you may even be removed from the platform completely. The advantage of slashing is that it keeps you safe from other people who are potentially trying to corrupt the system.
Crypto staking is a good idea as part of a long investment plan to help you earn rewards for your pre-existing cryptocurrencies. It’s relatively easy to get started but each platform has its own set of guidelines you should research before you jump into anything. And be sure to weigh up the risk and benefits to see if crypto staking is right for you!
