What is Staking & How Does It Work?

crypto staking

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The cryptocurrency business has proven lucrative in recent years, which has seen the value of different cryptos rise.

Besides trading the currency, many people are adopting a new method called ‘Staking,’ which has little risks but yields good returns.

Staking was engineered to facilitate moving away from mining, which is resource-intensive, to a more energy-efficient and lucrative transaction.

What is staking?

Staking is a new cryptocurrency transaction where a crypto holder earns a percentage or token for validating transactions on the blockchain. A crypto holder doesn’t have to sell or trade their currency to earn a commission, but they just have to validate the transaction and add a ‘block’ on the chain.

This article will look at how the staking process works, whether it’s safe, why you get paid to stake, and whether you can lose crypto by staking.

What is Staking in Cryptocurrency?

Cryptocurrency staking is a new way for crypto holders to earn passive income without trading their digital assets.

The investor, known as a participant, pledges a certain amount of their digital assets on the blockchain and helps to validate the transactions.

If every transaction clears out, you’re then paid a small token for participating. Staking only works with cryptocurrencies that run on a proof-of-stake transaction model that is deemed energy efficient, than the Proof-of-Work, or mining, which requires a lot of processing power.

Cryptocurrencies are moving away from the proof-of-work model because of the time it takes to validate the transaction, which also adds up the costs.

The proof-of-stake is almost instant and relies on participants to validate these transactions, helping to cut down the wait time and improve transactions.

How Does Staking Work?

You need to own a cryptocurrency that allows staking and utilizes the proof-of-stake transaction model to participate in staking.

You can use any cryptocurrency exchange that supports staking, with common ones being:

Who Allows Staking?

You start by buying the cryptocurrency that allows staking and supports the proof-of-stake model. Some common cryptos that allow staking include:

  • Ethereum
  • Polkadot
  • Cardano
  • Cosmos

 Unfortunately, Bitcoin doesn’t allow staking since it has adopted the proof-of-stake model, but still embraces the proof-of-work that requires mining.

Staking involves allowing a portion of your crypto portfolio to be used by the blockchain in exchange for getting a chance to evaluate the transactions on the chain.

If the transactions are authentic, your account is credited with a percentage of crypto. Most likely, you’ll get similar crypto you staked, but there are times you might be credited with a different cryptocurrency.

The process involves participants who pledge a portion of their currency to the blockchain, and one of them is chosen randomly to audit a transaction.

The more coins you ‘pledge’ to the blockchain, the higher your chances of getting picked to evaluate a transaction.

However, you still retain ownership of the coins, and you can un-stake them at any time.

Is Staking Safe?

Staking is very safe, and the chances of losing money or cryptocurrency are very slim. Almost every cryptocurrency exchange platforms allow staking, with newer cryptocurrencies adopting this form of transaction.

Unlike trading the crypto, where the gains depend on the market price, staking allows you to retain ownership of your crypto and still earn a passive income by validating recent transactions on the blockchain.

You also stand to make more money if the crypto prices rise, which is an added advantage, given how the crypto market grows fast.

Even so, getting picked to verify a transaction requires you to build enough reputation and pledge enough coins to the blockchain.

Why Do You Get Paid for Staking?

You get paid for staking since blockchain uses the cryptocurrency you have pledged for a while. Think of it as depositing your money into a savings account that earns you interest.

However, your interest in staking is more than what your savings account earns. However, you have to verify the transaction on the blockchain to get the rewards.

Using this method has helped to speed up transactions and lower the fees without requiring the bank or any financial institution interference.

Although some cryptocurrency exchange platforms might require a minimum stake to qualify as a validator, some allow you to pledge any amount of cryptocurrency in your wallet.

Can You Lose Crypto by Staking?

Staking might be a great way of earning a passive income with your cryptocurrency, but it comes with some risks.

First, you stand to lose some money if the value of the crypto falls after you’ve staked. Secondly, you can be fined for validating a fraudulent transaction.  

Cryptocurrencies’ value tends to fluctuate, making it hard to anticipate how the market will react. If you staked when Ethereum was trading at $2800 and the price fell to $2500, you’ve lost $500 worth of the crypto.

As a participant invited to validate any transaction on the blockchain, it’s your duty to ensure all the transactions are clean with no aggrieved parties.

However, if a transaction is flagged as fraudulent and you’re the one who has validated the transaction, you’ll be fined a certain percentage of your crypto portfolio.

When staking, you’re required to lock a certain portion of the crypto portfolio in a process called ‘vesting,’ and you’re not allowed to transfer or trade the currency for a given period.

This process can result in loose of income since the currency won’t be earning you anything even when the prices rise.

Should You Stake Your Crypto?

Cryptocurrency can be very lucrative if you know what you’re doing. If you’re not comfortable trading the currency, you can buy some crypto and use the staking method to earn a passive income.

However, the currency should support proof-of-stake to allow this type of transaction. You’ll be acting as a validator to ensure the assigned transactions on the blockchain are legal.

Staking is a safer cryptocurrency business, but it’s also easy to lose the crypto if the price goes against the stake.

Staking also facilitates fast transactions, unlike the proof-of-work transaction model.

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