Crypto Staking and How It Works
Crypto Staking and its working process are similar to the banks’ traditional Interest-bearing Savings accounts. The positive difference is in its larger income return rate. Crypto staking is a great investment option for earning passive income.
In this article, 36crypto will dive into the concept of crypto staking with a detailed explanation of the working mechanism of this cryptocurrency investment category.
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What is Crypto Staking?
The above picture is a simplified pictorial representation of the process of cryptocurrency staking. In the process of staking assets, you grant permission to the network to use your cryptocurrency to carry out a series of transactions through the Proof of Stake mechanism, verify and secure the blockchain, and reward interests.
Crypto Staking is a process of locking or holding cryptocurrency, supporting the operation of the network, and earning voting rights, and passive income without a need to sell.
Cryptocurrency staking is attributed to the traditional method of depositing money in a bank, in which an investor locks up their assets, and in exchange, earns rewards, or interest.
You can stake crypto tokens to earn rewards in the form of tokens which is usually the same crypto token used in the stake, or another second token entirely.
How does staking work?
There are two main consensus mechanisms in cryptocurrency which are proof of work and proof of stake. The mechanism works to ensure that transactions are legitimate and specific. On the approval of transactions, a new block is added to the blockchain. In essence, these protocols secure and stabilize the network.
Cryptocurrency staking works with the Proof of stake consensus mechanism. The proof of stake mechanism maintains security by employing validators to lock up crypto or put it at stake. In return for staking cryptocurrency to secure the network, the validators are given rewards. The rewards given to validators in form of passive income are calculated in percentage yields. These returns are typically much higher than any interest rate offered by banks.
Platforms to Stake cryptocurrency
There are two platforms where you can stake your crypto tokens.
Staking Pools: Staking pool platforms offer cryptocurrency staking solutions that “pool” together assets from multiple contributors.
Exchanges: Exchanges such as Coinbase, Binance, and other decentralized platforms offer crypto staking services and are the most accessible and easiest option for staking crypto.
Crypto tokens that Can be Staked
There are hundreds of crypto coins available, the top assets that are popular are:
- Ethereum (ETH)
- Polkadot (DOT)
- Solana (SOL)
- NEAR Protocol (NEAR)
- Cardano (ADA)
- Tezos (XTZ).
Risks of staking crypto
- The crypto staking ROI is susceptible to volatility.
- Minimum lock-up period applies to staking and it doesn’t allow for tokens to be withdrawn.
- There is a waiting period to be able to withdraw crypto tokens.
- There’s always the possibility for the network or a staking pool to become hacked thereby exposing tokens to security risks.
There are positive and negative consequences of staking crypto. The high yields accrued in staking make the process rewarding for investors. Exchanges are the best platforms of action to engage in cryptocurrency staking and making passive income.