Staking Crypto Explained: Pros, Cons & Options

Staking has become a popular way for crypto holders to earn passive income while supporting their favorite underlying blockchain network. The concept is similar to making a deposit in a bank and earning interest, but it is used in cryptocurrency. By storing and locking coins in a wallet for a certain period of time, you can help validate crypto transactions and secure its network. As a reward, you can receive newly created coins or a portion of transaction fees.

In this blog, we will dive deep into the world of staking crypto and evaluate its advantages, drawbacks, and popular coin options. Staking is an interesting topic that you should understand, whether you are a seasoned crypto investor or new to the crypto world.

What is staking in crypto?

In the crypto world, staking is a process in which individuals lock their digital assets in a smart contract for a certain period of time. This helps Proof-of-Stake (PoS) blockchain networks verify transactions. In return, the stakers receive rewards in the form of newly minted coins and transaction fees. This process improves network security and reduces the need for energy-intensive proof-of-work (PoW) mining, which is used in some cryptocurrencies.

What is Proof-of-Stake (PoS)?

Proof-of-Stake (PoS) is a consensus mechanism in blockchain that confirms cryptocurrency transactions. It aims to reduce the energy consumption required to secure a blockchain network. Unlike Proof-of-Work (PoW), which depends on energy-intensive mining to authenticate transactions, PoS relies on validators who stake their coins. These validators are chosen based on the quantity of their stake and the length of time they have held it. They are rewarded for adding a new block of transactions to the blockchain. Their staked tokens are an assurance of the authenticity of the added transactions. If transactions in a block are deemed to be invalid, the network may burn some of the validator’s stake in a "slashing event".

The most well-known cryptocurrency-Bitcoin, employs the PoW mechanism while Ethereum has transitioned from PoW to PoS since September 2022, in an event known as "Merge."

How does crypto staking work?

Proof-of-Stake (PoS) chains, as opposed to Proof-of-Work (PoW), uses a process called "staking" to create and validate blocks. During the staking process, participants must lock up their coins and the protocol randomly selects validators at specific intervals to create a new block.Participants that stake a larger quantity of coins or keep coins for a longer period of time have a better chance of being selected as validators.

Unlike PoW mining, staking requires a direct investment in the crypto being staked. Validators are incentivized to contribute to the network security because failure to do so may result in the loss of their entire investment. Staking is becoming much easier these days. You can participate in staking certain coins by using a related crypto wallet. Staking is available in PoS coins, such as Ethereum,Polkadot, Tezos, Polycon, Binance, Solana and Avalanche.

What are the advantages of crypto staking?

Staking is seen by many long-term crypto holders as a way to make passive income from their holdings. Aside from financial reward for validators, there are several other advantages of staking cryptocurrency:

• Staking helps the blockchain generate and validate blocks
• Staking boosts the network security
• Staking does not require technical expertise or hardware (as opposed to PoW mining or Bitcoin Mining)
• Staking is efficient and helps increase blockchain transaction capacity
• Staking members may receive governance tokens to vote on the blockchain project’s development and operations.

What are the risks of crypto staking?

Some of the risks associated to staking cryptos include:

• Liquidity loss: Staking requires a lockup or vesting period during which the crypto cannot be transferred for a specified amount of time. This ties up assets and restricts their accessibility.
• Slashing: Validators who violate network rules risk losing a portion of their stake.
• Minimum Stake: Most networks require a minimum amount to be staked in order to participate, which can be a barrier for those who do not have enough coins/tokens.
• Platform Risk: If the platform used to stake crypto fails or is hacked, the staked assets are at risk. The bankruptcy of the Celsius Network is an iconic example.

What cryptocurrencies you can stake？

A wide selection of PoS coins are available for staking. As mentioned previously, staking carries considerable risks that may result in significant loss. When determining if a coin is worth staking, consider factors such as market circumstances, staking returns, and platform stability. Some of the popular staking coins include:

• Ethereum (ETH)
• Binance (BNB)
• Solana (SOL)
• Polkadot (DOT)
• Algorand (ALGO)

*This list is for reference purposes only and does not constitute financial advice. You should be aware that the list of popular staking coins changes over time. Always conduct thorough research and review your individual financial goals, risk tolerance, and personal circumstances before investing in staking.

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