Staking has become extremely popular among the crypto community recently, and this lucrative strategy for earning passive profits on your digital assets is generating a lot of hype. In this post, the world of crypto staking is explained, as we to define what staking in crypto is, how it generates a profit, how it can impact the market and what level of risk it entails
The Basics of Crypto Staking Explained
Staking is a growing trend in crypto that involves locking up digital assets in a smart contract for a Proof-of-Stake (PoS) network. The assets are then put to work validating transactions and securing the blockchain protocol, for which you are rewarded with passive staking profits.
The way staking in crypto works is that you buy coins to stake and each PoS protocol has its own individual requirements, such as a minimum number of staked tokens. It can be done with relative ease, directly from your wallet. The number of transactions assigned to each node for validation is determined by the number of coins staked, and more validated transactions mean higher passive profits.
The Advantages of Staking in Crypto
There are multiple benefits to staking cryptocurrencies that range from its effortlessness to the potential profitability as well as the low costs and energy inefficiency.
A Simple Source of Passive Profits
First and foremost, staking crypto is exceptionally low effort and can be performed easily with just a few clicks. There are plenty of PoS-based cryptocurrencies that enable you to stake and earn interest, without needing to engage in the process of validating blocks.
Staking provides a comparatively reliable source of passive income that ranges, on average, from 5-12%, in return for simply locking up your funds.
Crypto is permissionless, so while the project developers may place certain conditions on the use of their staking services, any coin holders can earn interest as a reward for allowing their crypto to be used to support the protocol.
The Low Cost of Participation
Another benefit is the fact that staking is very cost-efficient, particularly when compared to passive investment strategies for traditional financial assets, which tend to incur significantly higher fees.
Greener than Proof of Work (Mining)
Proof of Work (PoW) involves the use of specialized computers, which have high financial cost and huge energy requirements. The more computer power the miner has, the better the hash rate, and the higher the reward. A lot of power is required to solve the mathematical equations, validate transactions, and add blocks to the blockchain through mining. The energy cost has negatively impacted Bitcoin prices in a number of instances, such as when Elon Musk raised the environmental issue with regard to Tesla. The exceptionally high energy requirement is also broadly believed to be a major factor fuelling the Chinese crypto crackdown.
In contrast, Proof-of-Stake (PoS) is an energy efficient, low-cost alternative. Your staked coins are used to validate transactions, and you will be compensated with greater rewards the more staked tokens you have, without the same impact on the environment.
The Dangers of Staking in Crypto
Staking crypto involves relatively low exposure although as with all crypto investing a degree of risk is incurred from shifting market conditions.
Let’s say you want to stake Ethereum, which among the many staking coins now available is by far the most popular. To become a full validator, you need to stake 32 ETH, which is a sizable sum, so if the price drops, as it did recently in reaction the tightening of the Chinese crypto ban, your capital will also lose value.
Then of course there is also a risk with automated market making protocols. If you place your tokens in a staking pool, and either an unscrupulous project developer or a whale takes out all their liquidity at once, the price could plummet, as there is not enough liquidity left for other participants to access.
