Press "Enter" to skip to content

What is staking and how does crypto staking work?

Will you be investing in cryptocurrencies this year? Crypto staking can be a great way to supplement your income, whether to combat inflation or because the rate on a savings account is no longer sufficient.

By staking crypto assets to earn interest, users may set it and forget it. Following the recent crypto market sell-off, many people may be wondering if staking bitcoin is still worthwhile. But don’t be alarmed. Staking cryptocurrency assets has a number of advantages. Read more about Multibank.io.

What is staking?

Some cryptocurrencies employ staking to validate transactions. It’s all part of the “proof of stake” consensus mechanism. This entails those who already own a stake in the blockchain’s native currency adding blocks of transactions to a blockchain, an indelible string of “blocks” of transactions.

Read more: NFT vs. Crypto: What Is the Difference?

Mining, which is used to add blocks to the blockchain of proof-of-work blockchains like Bitcoin, is analogous to this process. The method is known as forging or “minting” in the case of proof-of-stake blockchains, and the persons who conduct it are regarded as validators or forgers rather than miners.

If you have some PoS crypto, you can earn coins in exchange for your stake, with the quantity varying based on the currency and how you stake your coins. But staking is not without risks, as we will discuss in more detail below.

What is proof of stake?

So, what exactly is this “proof-of-stake” thing that everyone is talking about? Proof-of-stake or PoS is a consensus mechanism used in blockchains to process transactions and create new blocks.

Validators in a proof-of-stake blockchain process transactions and create new blocks in the same way that miners do in a proof-of-work blockchain (such as Bitcoin). The distinction is that, instead of racing to be the first to solve complicated mathematical problems like miners, nodes (computers that participate in building the blockchain) win the privilege to generate a block by setting aside (or “staking”) a specific amount of their holdings.

A validator is then chosen at random from among all people who have staked a minimum quantity of bitcoin for each block. Following that, this validator generates the block, which is then validated by other validators.

The validator receives a reward for establishing the new block in the form of the blockchain’s native coin, such as Ethereum blockchain, but if the block contains a fraudulent transaction, they lose some or all of their stake!

The proof-of-stake method employs parameters such as how long the validator has held the stake, the size of the stake, and a dash of randomization to determine who will be the next validator to verify the block.

This requires significantly less computational power and electricity than it does for proof-of-work system miners to gain the right to create a block by solving a hard math problem first. As a result, proof of stake is both a greener and more efficient process than proof of work, and it frequently results in transactions being validated more quickly.

Which cryptocurrencies use proof-of-stake consensus?

Bitcoin, for example, relies on a proof-of-work paradigm and does not use proof-of-stake procedures. However, there are plenty that do, including:

  • ADA (Cardano),
  • SOL (Solana), and
  • AVAX (Avalanche).

Furthermore, Ether’s blockchain Ethereum is in the midst of transitioning to a proof-of-stake system, with intentions to complete the transition by the end of 2022.

How does staking cryptocurrency work?

There are several ways to get engaged with staking money that are far more convenient than being a validator yourself. Staking on a bitcoin exchange or joining a staking pool are two examples.

 Staking on a cryptocurrency exchange

Staking through a cryptocurrency exchange involves making your crypto available for use in the proof-of-stake process through an exchange. It essentially allows holders to monetise their crypto holdings, which would otherwise be idle in their crypto wallet.

The exchange conducts much of the administrative work for you in this manner, looking for a node for you to join so you don’t have to. It is not without risk, though, because you must entrust your coins to the exchange and node in question.

Joining a staking pool

A staking pool, like a mining pool, allows stakers to collect block rewards by pooling their resources. These pools often use a two-tier architecture, with an administrator supervising the work of the validators and ensuring that everything runs well. When rewards are won, they are distributed between the pool operator and pool delegators, however some pools levy entry and membership fees in addition.

What are the advantages of staking crypto?

  • There are numerous reasons to stake a cryptocurrency, including:
  • The possibility of big rewards (depending on the coin you’re staking!).
  • The satisfaction of playing an important role in a cause you believe in—proof-of-stake currencies simply cannot function without their stakers.
  • Staking requires no special equipment.

Which Cryptos Can Be Staked?

Ethereum (ETH), Polkadot (DOT), Solana (SOL), NEAR Protocol (NEAR), Cardano (ADA), and Tezos are among the most popular and often staked cryptos (XTZ).

What Are the Benefits of Staking Crypto?

Cryptocurrency can be safely stored in a wallet, and ownership can be preserved throughout the crypto staking process. Staking cryptocurrency also gives benefits for confirming transactions and securing the network.

This reward is a percentage yield, akin to a dividend or interest on a checking or savings account. The return varies depending on the cryptocurrency invested, but in almost all cases, it is significantly larger than the annual percentage yields that consumers generally obtain from traditional institutions.

What are the risks of staking crypto?

However, staking is not a risk-free activity. You may encounter some of the following hazards when staking cryptocurrency:

  • The value of your staked crypto isn’t constant—because crypto values are frequently volatile, your assets’ value could drop with no warning, making it a considerably less rewarding enterprise.
  • Some proof-of-stake cryptocurrencies include lock-up periods, during which you will be unable to access your cryptocurrency.
  • Depending on your strategy, you may need to entrust your crypto to an exchange so that it may be staked, which can pose security problems.