You must have heard a lot about staking crypto. Plenty of crypto investors use this method for their passive income. Staking also allows blockchain networks to work by verifying transactions. Absolute win-win?
What is staking crypto?
Crypto staking is a way to participate in the consensus mechanism of a proof-of-stake (PoS) blockchain network. By holding and staking the network’s native cryptocurrency, stakers become validators and help secure the network by verifying transactions. In return for their participation, stakers receive rewards such as newly minted coins. It is an alternative to proof-of-work, where rewards are given to miners for their significant computational input.
How to stake crypto?
You must first hold a certain amount of the network’s native cryptocurrency. By staking cryptocurrency in a specialized wallet on crypto staking platforms, you become a validator and contribute to the validation of transactions and the addition of new blocks to the blockchain.
Staking provides several benefits to a blockchain network, including increased security, reduced energy consumption, and more decentralized distribution of power. Since validators are encouraged with rewards, there is less motivation for them to act in a bad way and compromise the network. Additionally, since staking does not require the computational power necessary for mining in PoW systems, it is a more energy-efficient method of achieving consensus.
That is why staking is a way for investors to earn passive income by holding and participating in the security and growth of a PoS blockchain network.
Crypto staking vs bank deposit
Crypto staking and bank deposits share some similarities, but there are also important differences.
Like a bank deposit, staking allows individuals to earn passive income by holding onto their assets for a certain period of time. Both staking and bank deposits offer the potential for profit, but the specifics of the return vary.
There are notable differences between staking and bank deposits. Staking requires holding and locking up a cryptocurrency, whereas a bank deposit requires holding a fiat currency. The returns from staking are linked to the performance of the staked cryptocurrency and can be subject to market volatility when bank deposit returns tend to be more stable.
Pros and cons of staking cryptocurrency
Crypto staking looks like a very compelling way of investing in cryptocurrencies. That’s why it’s important to figure out all pitfalls and possible benefits of staking.
Pros of staking cryptocurrency
- Passive Income. Staking offers the potential for passive income through the rewards received for participating in the network’s consensus process.
- Security. Staking helps to secure the network by distributing the validation process among multiple participants.
- Energy Efficiency. Unlike proof-of-work systems, staking does not require significant computational power, making it a more energy-efficient method of achieving consensus.
- Improved Governance. In some PoS systems, staking can also provide voting power to stakeholders, enabling them to participate in governance decisions that impact the network.
Cons of staking cryptocurrency
- Lock-Up Period. Staking requires locking up a certain amount of cryptocurrency for a set period, during which the coins are not available for use or sale.
- Volatility. The value of the staked coins can be impacted by market conditions, potentially leading to losses for the staker.
- Competition. The competition for rewards can be high in popular PoS networks, leading to lower returns for stakers.
Staking is a very promising method in crypto investments. Though it also has negative factors, crypto staking is set to have a long and prosperous future. If you want to find the best crypto staking platform, pay attention to centralized exchanges. They provide users with various ranges of assets to stake and easy-to-use platforms.