Crypto Staking For Beginners: How Does It Work?

When people think about investing in cryptocurrency, they normally think of two options: purchasing it directly or crypto mining. But crypto staking is another way to make money in the crypto market.
That said, “staking” is a relatively new concept, and it can be confusing. Investing directly in crypto is straightforward, and “mining” is at least a good real-world analogy for what you’re doing when you’re mining. What exactly is staking, and how can you earn money by doing it?

We’re about to discuss everything you need to know about crypto staking, from the basic mechanics to the best crypto staking coins. Let’s begin!

What Is Staking Crypto?

Crypto staking is a method some cryptocurrencies use to validate transactions on the blockchain. A blockchain is a public historical digital record of who owns which bits of cryptocurrency. This is one significant difference between cryptocurrency and ordinary fiat currency, where records are kept by central authorities like banks.

On the blockchain, individual transactions are stored in packages known as “blocks,” and added to the record. To help keep things honest, blocks can only be accepted if someone is willing to guarantee the block with a portion of their own cryptocurrency. This process is known as staking.

When your proposed block is accepted, you earn a small amount of cryptocurrency. That said, there are also risks to staking – if you stake a block with inaccurate information, you’ll be charged a penalty. When this happens, it’s called “slashing.”


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crypto staking

How Does Crypto Staking Work?

Crypto staking only works with cryptocurrencies that use a proof-of-stake model. Some cryptocurrencies, like Bitcoin, use a proof-of-work model, which requires miners to validate new blocks. But proof-of-work is energy-intensive, whereas a proof-of-stake system requires far less energy.

To get involved, you’ll first need to own some of the type of cryptocurrency you want to stake. So, for example, if you want to stake Ethereum, you’ll need to sign up for an exchange and buy some Ethereum.

Next, you stake a certain amount of currency to the blockchain. Whenever a new block is added, a stake is chosen to validate that block. When a block is added to the chain, a small amount of new cryptocurrency is minted, and given to the validator as a reward.

When you make a stake, the size of the stake makes a difference, and the more you stake, the higher your potential earnings. Moreover, the system prioritizes larger stakes over smaller ones. So not only will you be earning more per block, you’ll also validate more blocks over all.

Keep in mind that a larger stake also means higher potential losses. As with any investment, never invest more money than you’re willing to lose.

When you stake your currency, you continue to own it, and you can unstake it and sell it if you want to. That said, most cryptocurrencies require you to stake your currency for a minimum amount of time. For example, Ethereum stakes are currently locked until Phase 1.5, which is not expected to launch for the next 1-2 years.

What Exactly Is Proof Of Stake?

Proof of stake is one of a few different consensus mechanisms used to validate blockchain transactions. A consensus mechanism is a method by which various blockchain nodes agree on which blocks get added to the chain.

When you stake cryptocurrency, you’re putting some of your own crypto on the line. Once you’ve validated a block of transactions, you’ll receive a small reward payment.

What Returns Does Crypto Staking Offer?

Crypto staking works a lot like a dividend stock. You make an upfront investment, and you receive a small, but consistent stream of payments. These payments can serve as a form of passive income, or you can stake them back to the cryptocurrency in a process that works a lot like compound interest.

Your actual returns will depend on a variety of factors. To begin with, different cryptocurrencies offer different block rewards, which makes a big difference. Similarly, different currencies will have different amounts of supply set aside for validators. Larger staking pools, meanwhile, will earn more consistent payouts.

As with any cryptocurrency, you’ll also need to think about the fiat currency value. If the coin’s fiat value rises or falls, that will affect your staking investment.

How To Stake Crypto In 3 Steps

Staking cryptocurrency is relatively straightforward. First, you’ll need to choose whether to validate transactions using your own computer or outsource that task to a crypto staking network. These networks take a percentage of your earnings in exchange for doing the processor work.

After that, follow these simple steps:

1. Purchase a cryptocurrency with proof of stake
Choose what cryptocurrency you want to invest in, and buy some coins. We’ll talk about the best staking coins in the next section.

2. Transfer your cryptocurrency to a blockchain wallet
When you first buy cryptocurrency, it’s only available on the exchange where you bought it. If you don’t want to use a wallet, you’ll need to buy your crypto on an exchange that has its own staking program.

To use an off-platform staking program, you’ll need to put your coins into blockchain wallet. This can be either a software wallet or a USB drive-style hardware wallet.

A crypto wallet works a lot like your real-world wallet. It’s used to transport your coin from one exchange to another, or from an exchange to a staking program.

3. Join a crypto staking pool
Most cryptocurrencies that use staking also use what’s called a staking pool. A staking pool is a group of investors who pool their funds to improve their odds of earning rewards. A staking pool also runs its own servers, so you don’t have to put your personal computer to work.

When choosing a staking pool, look for one with reliable servers and at least 99% uptime. Also, consider their fees. These can vary considerably, but anything over 5% is probably overpriced.

Finally, choose a mid-sized pool. Smaller pools can earn you a larger return per transaction, but you won’t be able to validate many transactions. Conversely, the largest pools will earn a large total reward, but your individual percentage might be too small.

Transfer your coin from the wallet into the pool, and start earning!

what is crypto staking

5 Popular Crypto Staking Coins

So, what are the best crypto staking coins? Here are some of the most popular.

  • Ethereum – Ethereum is a very popular currency, not just for staking, but also for spending and investing. You’ll need at least 32 ETH to get started, but rewards range from 5-17% per year.

  • Cardano – The Cardano network has its own native staking pool, so staking is a breeze. Advanced users can also set up their own staking pools.

  • Solana – Solana is another popular choice, with its on staking program.

  • Polkadot – This currency was launched in August, 2020, so it’s less than two years old. It’s designed to support multiple different blockchains, and stakers can earn as much as 12% per year.

  • Cosmos – Cosmos is a lot like Polkadot, in that it’s designed to work across multiple blockchains. In the past, Cosmos staking has earned around 7% per year.

Pros & Cons Of Crypto Staking

All investments have their own benefits and drawbacks. Here are some of the reasons you might – or might not – want to get involved in crypto staking.

Benefits Of Staking Crypto

  • You earn rewards, just like investing in a dividend stock.

  • Staking requires fewer resources than crypto mining.

  • Stakers have voting rights, and can participate in decisions on forking.

  • Staking is easy, particularly if you’re using a staking pool.

Risks Of Staking Crypto

  • Cryptocurrency is volatile, and can gain or lose value rapidly.

  • Your coin can remain locked in for months or years.

  • If your validation hardware makes mistakes, you could be subject to slashing.

  • You’ll have to pay fees to your exchange or pool.

Is Crypto Staking For You?

Crypto staking can be a good or a bad choice, depending on your investment strategy. To begin with, it’s a medium-to-long-term investment. Your coin is going to be locked up for months at least, and more likely for years. If you’re looking to earn a quick return, this might not be the best choice for you.

Then again, crypto staking is relatively easy. Unlike trading, you don’t have to constantly watch the market. And unlike mining, you can outsource the processing work to a staking pool, so you don’t have to build a mining rig. All you have to do is put your coin in a wallet, and deposit it with your pool of choice.

Summary

Crypto staking is a way to earn money without trading coins or mining them. Like all investments, it comes with some risks, but it also has a lot of potential upside. Most importantly, it’s a form of passive income. All you have to do is stake your coin, and watch the rewards come in. If that appeals to you, this investment is worth considering.


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