How Crypto Staking Works

By Kevin • January 20, 2022 3:46 pm • Comments

Crypto staking is the process of locking up a certain amount of crypto assets in order to gain interest or rewards for it similar to how you would earn interest for fiat currencies.

Investors often use staking as a way to continue to earn more without having to buy more assets and also as a way to earn passive income stream as their is often no other requirement besides holding the asset.

Staking crypto has been a topic of high interest recently because the yields that cryptos have are often much greater than interest rates that you might see in recent years if you were dealing with fiat.

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As a result, many investors and holders are attracted to these high yield rates as way to hedge themselves from high levels of inflation in their local currency.

Investors are often rewarded with the staking rewards which are the incentives that you would get.

Cointelegraph breaks down the process:

Staking rewards are incentives provided to blockchain participants.

In every blockchain, there is a certain amount of crypto rewards allotted for the validation of transactions.

As such, participants who stake crypto receive staking rewards when they are chosen to validate transactions.

Basically, staking allows participants to earn more crypto.

Interest rates vary depending on the network, but participants can earn as much as 20% to 30% yearly.

Many people stake crypto to earn passive income or invest their money.

There are multiple ways to get involved in staking cryptocurrencies as a way to earn passive income.

One option is to get involved through an exchange to stake tokens on your behalf.

However, exchanges will often ask for a commission in exchange for their staking services and exchanges that provide these types of services include Binance, Coinbase, and eToro.

Another way is to get directly involved with a staking pool so you don’t have to rely on an exchange where you connect your tokens via your wallet to the staking pool.

However, there are multiple things to consider before you decide to start staking as proper research will allow you to select tokens that have value and actually have the ability to reward you with staking incentives.

Cointelegraph shares more detail on things to look out for:

Coin value: Steer away from staking a coin with very high inflation rates.

You may earn big rewards initially, but since the value of the coin is volatile, you may be left with little to no profit.

Fixed supply: Ensure that the token or coin has a fixed supply.

Limited circulation of coins within the market ensures a healthy demand and constant price boost.

Actual applications: Cryptocurrency demand largely depends on a coin’s actual applications.

If it is widely used for various applications in the real world, such as for digital payments, it will continue to have a healthy demand and price.

Popular blockchains that are typically chosen for staking in recent years include Ethereum, Cardano, and EOS.

All of these blockchains can provide annual yields of anywhere from 5% to 24% depending on the specific token which makes them all have greater yields than rates typically seen in more traditional financial instruments.

With that being said, these above average yields do come at a cost as it is possible to also lose capital when staking.

For example, if the token that you are staking has value that is decreasing, then technically you could lose value despite the amount of tokens you hold increases.

Crypto staking in recent years has become very popular as the crypto industry continues to obtain mainstream awareness and as inflation worries for fiat currencies continues to increase.

 

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