What is staking in crypto?

Crypto staking has become a popular crypto management tool among crypto enthusiasts and industry veterans. It’s another way to grow your assets effortlessly, without touching the actual funds. To earn rewards, the participant should pledge the coins to the staking pool. The final rewards depend upon the number of participants.

Staking can be cold and hot, where the former requires a user to keep digital assets in a designated offline wallet without moving them to another address, and the latter only needs coins to be held in a staking pool.

In this article, we will dive into staking and explain how it works.

How staking works

What is staking?

Staking is a practice used to confirm blocks in blockchain running on Proof-of-Stake (PoS) protocol. Participants that are also called validators pledge their coins and receive rewards every time the block is added. Once the block is confirmed, newly minted coins are distributed among validators.

History of crypto staking

Proof-of-Stake (PoS) was first theorized by Sunny Scott and Scott Nadal in 2012. They were concerned about the rising energy consumption of the Bitcoin mining and believed that PoS would solve this issue. At the time, $150,000 was the average cost of the Bitcoin blockchain maintenance. In 2017, the figure reached $6.7 million, and the idea of moving from Proof-of-Work to Proof-of-Stake caught the eyes of many crypto creators, including Vitalik Buterin, Ethereum’s founder.

Staking vs. mining

Staking and mining have the same goal but are operating differently:

  • Mining is required for blockchain running on Proof-of-Work (PoW) protocol. Under the protocol, miners are competing for the chance to complete the block and reap the rewards. However, mining requires high computational power, specific graphic cards, and mining rigs that tend to be expensive. Furthermore, the mining difficulty has increased dramatically over the past five years, and now it’s quite challenging to solve math puzzles for a single miner.
  • Staking cryptocurrency is different. To participate, all you need is to pledge the coins. The more coins you pledge, the higher rewards you will receive. However, the drawback of the PoS protocol is the possible monopolization of space, as the one who stakes the most coins gets the largest piece of a pie.
Proof of Work VS Proof of Stake
Proof of Work VS Proof of Stake

Pros of staking crypto

  • Easy way to earn interest on crypto holdings. To earn interest, all you need is to join the staking pool with a certain amount of coins. Rewards depend on the particular staking pool and the number of participants — the fewer people are involved, the higher reward one can get. At the moment, APY ranges between 5-20%.
  • No special equipment is required. To be a miner, you need special equipment with high processing power, such as ASIC. Staking avoids that and only requires coins to be pledged to a staking pool.
  • Claim rewards at any time. In most cases, you can claim your rewards any time by unstaking your coins. However, some cryptocurrencies and crypto exchanges will require you to lock the funds for a certain period.

Cons of staking crypto

  • High volatility. The Crypto market remains subject to high volatility. Unlike traditional markets, the crypto industry does not have defined regulations, making it a high-risk-high-reward space. The same goes for staking — you receive staking rewards in cryptocurrency that you pledge. If it plummets, its fiat value can drop.
  • Possible funds freeze. In most cases, your staked coins can be claimed at any time, but some cryptocurrencies can require you to lock the funds for a certain period. For example, you can’t claim the Ethereum staking rewards instantly. You will have to wait for a complete rollout of PoS to be able to do so.

Should you stake crypto?

  • Stake if уou plan to hold. Staking is similar to a bank savings account. You keep your funds intact for several months or years to get the interest. If you are a hodler, staking is a great way to get more coins without spending more cash.
  • Avoid staking if you plan to trade. To earn coins through staking, you need to wait for some time to gain interest, meaning your funds should remain intact. This works well for investors, but not traders.

Wrapping up

Staking is a great way to earn on your cryptocurrency without moving a finger. A high-interest rate ranging between 5% and 20% looks like a risk-averse and quite an attractive option. However, keep in mind that crypto is a subject of high volatility, which means that even if staking is one of the safest crypto management tools out there, you can still lose the fiat value on your funds. Thus, it’s important to understand the crypto market and find a good point of entry.

Furthermore, keep an eye on conditions offered by the crypto management platform. Some will require funds locking, while others are flexible. If you are looking for a platform with a great APY and compound interest credited daily, try CoinLoan. APY starts at 5.2% or 7.2% with CLT staking. Want to know more about this option? Follow the link.