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With cryptocurrency, one way to make a profit is to sell your investment when the market price rises.
There are other ways to make money in crypto, such as staking. With staking, you can put your digital assets to work and earn passive income without selling them.
In some ways, staking is similar to depositing cash into a high yield savings account. Banks lend your deposits and you earn interest on your account balance.
In theory, staking isn’t too different from the bank deposit model, but the analogy goes no further. Here’s what you need to know about crypto staking.
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What is staking?
Staking involves locking crypto assets for a set period of time to help support the operation of a blockchain. In exchange for staking your crypto, you earn more cryptocurrency.
Many blockchains use a proof-of-stake consensus mechanism. In this system, network participants who wish to support the blockchain by validating new transactions and adding new blocks must “stake” fixed sums of cryptocurrency.
Staking helps ensure that only legitimate data and transactions are added to a blockchain. Participants trying to earn a chance to validate new transactions offer to lock sums of cryptocurrency into staking as a form of insurance.
If they incorrectly validate erroneous or fraudulent data, they may lose all or part of their stake as a penalty. But if they validate correct and legitimate transactions and data, they earn more crypto as a reward.
Popular cryptocurrencies Solana (SOL) and Ethereum (ETH) use staking as part of their consensus mechanisms.
Validation of proof of stake
Staking is how proof-of-stake cryptocurrencies cultivate a functioning ecosystem on their networks. Generally, the bigger the bet, the more chances validators have to add new blocks and earn rewards.
“In PoS, validators stake their assets like an in-game skin, which is shrunk or destroyed if they behave maliciously,” says Gritt Trakulhoon, principal crypto analyst for Titan, an investment platform. For example, trying to create a fraudulent block of transactions that did not occur.
As validators accumulate larger amounts of stake delegations from multiple holders, this proves to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighted in proportion to the amount of stake the validator has attracted.
Also, a bet does not have to consist of only one person’s chips. For example, a holder can participate in a staking pool, and staking pool operators can do all the heavy lifting to validate transactions on the blockchain.
Each blockchain has its set of rules for validators. For example, Ethereum requires each validator to hold at least 32 ETH. As of this writing, it’s around $55,000. A staking pool allows you to collaborate with others and use less than this high amount to stake. But one thing to note is that these pools are usually built through third-party solutions.
If you own a cryptocurrency that uses a proof-of-stake blockchain, you are eligible to stake your tokens.
Staking locks your assets to stake and helps maintain the blockchain security of this network. In exchange for locking up your assets and participating in network validation, validators receive rewards in this cryptocurrency called staking rewards.
Many top crypto exchanges, like Binance.US, Coinbase, and Kraken, offer staking rewards. “A more passive or novice user can simply stake their cryptos directly on the exchange for a bit more convenience, in exchange for the exchange taking a portion of the staking returns,” Trakulhoon explains.
You can also set up a cryptocurrency wallet that supports staking.
Read more: The best staking platforms
“Each blockchain network typically has one to two official wallet apps that support staking. For example, Avalanche has the Avalanche wallet, and Cardano has the Daedalus and Yoroi wallets,” Trakulhoon points out.
If you have your tokens in one of these wallets, you can delegate how much of your wallet you want to set up for staking. You choose from different staking pools to find a validator. They combine your tokens with others to increase your chances of generating blocks and receiving rewards.
When you choose a program, it will tell you what it offers for staking rewards.
As of July 2022, crypto exchange Kraken offers an annual percentage yield (APY) of 4% to 6% for Cardano (ADA) staking and 4% to 7% for Ethereum 2.0 staking. Because the Ethereum 2.0 network upgrade is not yet complete, there are some caveats on Kraken to stake Ethereum.
Once you have committed to staking crypto, you will receive the promised return on schedule. The program will pay you the yield of the staked cryptocurrency, which you can then hold as an investment, set up for staking, or trade for cash and other cryptocurrencies.
The program might also have restrictions such as you have to commit your stake for three months before getting your chips back.
What are the benefits of crypto staking
- Earn passive income. If you don’t plan to sell your cryptocurrency tokens in the immediate future, staking allows you to earn passive income. Without staking, you would not have generated this income from your cryptocurrency investment.
- Easy to start. You can start staking quickly with an exchange or crypto wallet. “It’s as simple as setting up a crypto wallet, loading it with cryptos, and clicking the ‘staking’ button on validators or staking pools in the wallet app,” Trakulhoon explains.
- Support the crypto projects you love. “Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking part of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions,” says Tanim Rasul, COO and co-founder of National Digital Asset Exchange, a trading platform for cryptocurrency in Canada.
What are the risks of staking crypto
When you stake your chips, you may need to commit them for weeks or months depending on the program. During this time, you will not be able to withdraw or exchange your tokens.
In response to this issue, Trakulhoon notes that “for some blockchains like Ethereum, there are decentralized finance (DeFi) apps like Lido Finance and Rocket Pool that offer liquid staking products. These products offer a tokenized version of staked assets, essentially making them “liquid”.
However, since you are selling in a secondary market, you must find a willing buyer or lender. Also, there is no guarantee that you will be able to do so or get all your money back sooner.
Cryptocurrencies are also extremely volatile investments, where double-digit price swings are common during stock market crashes. If you stake your cryptocurrency in a program that locks you in, you won’t be able to sell during a downturn. The staking platform you choose could offer lucrative annual returns, but if the price of your staked token drops, you could still suffer losses.
Many proof-of-stake networks use “slashing” to punish validators who take improper action, destroying some of the stake they put on the network. If you bet with a dishonest validator, you could lose part of your investment because of this.
“The discount mechanism is intended to incentivize token holders to only delegate their tokens to validators they deem trustworthy or trustworthy, and not to delegate all of their tokens to a single or small number of validators. validators,” says Trakulhoon.
Should You Stake Crypto?
Staking is a good option for investors interested in generating returns on their long-term investments who don’t care about short-term price fluctuations. If you need to get your money back in the short term before the staking period ends, you should avoid locking it up for staking.
Rasul advises you to carefully review the terms of the staking period to see how long it lasts and how long it would take to get your money back at the end when you decide to withdraw.
He recommends only working with companies with a positive reputation and high security standards.
If interest rates seem too high to be true, you should approach with caution, experts say.
Finally, staking, like any cryptocurrency investment, carries a high risk of losses. Only bet money that you can afford to lose.
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Fundamentals Of Crypto Staking – Forbes Advisor – Tech Tribune France
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