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What is Crypto Staking and How it Works

Learn about the way to grow your crypto holdings without buying more

Credit: Dribbble

In simple terms, staking is one strategy that can even generate a passive income. You simply deposit coins for a fixed period of time to earn interest.

But how does it work? Who can do it? Let’s find the answers to all those questions and more in this breakdown of staking.

TLDR; Here’s a video to help you understand what is staking just in case you’re not having time to read through.

What is Staking in Crypto?

Staking is a way of earning interest on your cryptocurrency by depositing it for a fixed period of time. Staking works in a similar way to interest accounts with traditional banks.

Traditional banks pay interest because the bank uses your funds for things like loans and other investments. In staking, your cryptocurrency is put to use as well. The term staking refers to the Proof of Stake or “PoS” protocol, in which deposited coins are used to verify transactions on the blockchain.

Verified transactions become new blocks on the blockchain. For cryptocurrencies that support staking, proof of stake is necessary for that process. Whoever participates in successfully creating a new block is rewarded.

Cons of Staking Crypto

  • May be locked into a fixed term
  • Risk of slashing penalty
  • May incur fees

Pros of Staking Crypto

  • Earn interest on crypto
  • Faster, cheaper transactions
  • More energy efficient
  • Potential voting rights
crypto staking
Photo by Bermix Studio on Unsplash

How to Stake Cryptocurrency

There are two methods of staking, though one requires a lot more work than the other.

  1. The first method involves setting up your own node and running it yourself. This requires a fair amount of knowledge and expertise in staking and the coin that you’ve decided to stake.
    You must also meet the staking minimum, which at the time of writing was 32 ETH, to become a “full validator.” This can be achieved by joining a staking pool, where stakers work together to cross the minimum threshold.
  2. The second (and easiest) method is to stake through an exchange or other crypto platform. Doing it this way is as simple as depositing your coins and agreeing to stake them.

Popular exchanges, like those listed below, offer staking options:

  • Binance: Stake ETH2 or try Defi staking (higher APYs with higher risk)
  • Coinbase: Earn up to 5% with ETH2, Tezos, Cosmos, and more
  • Kraken: Off-chain and On-chain staking will earn you as much as 12% (depending on the coin)

How is Staking Crypto different from Mining ?

Staking and mining are both “consensus mechanisms.” They are used to confirm that transactions are legitimate and that nobody is, for example, trying to spend the same coins more than once. This confirmation is available to

What is mining?

Mining functions under a Proof of Work protocol, where miners compete to solve cryptographic puzzles.

The one who completes it the fastest wins the right to verify the newest block of transactions on the blockchain, as well as a small reward in the cryptocurrency they’re mining.

However, mining uses a lot of computing power and a lot of energy. A lot. According to a report by Digiconomist published in September 2021, the energy consumed in a single Bitcoin transaction is equivalent to that used by an average U.S. household over 61.47 days.

What is staking?

Staking, on the other hand, is far more efficient. It also comes with the benefit of potentially increasing transaction speed and lowering fees.

Proof of stake doesn’t require stakers to solve problems; it just requires them to deposit their coins.

There are some experts who believe that crypto staking will ultimately make mining obsolete. Mining started off as an option for users to earn Bitcoin at home, when Bitcoin was worth a whole lot less. With more widespread adoption, the bar for mining has gotten a whole lot higher. Staking is still accessible to the average crypto investor.

Here’s a video to help you understand the difference between proof of work and proof of stake,

Conclusion

The staking process has a lot to offer for both those involved in the world of crypto and those outside of it.

Stakers can earn interest on their cryptocurrency holdings, potentially increase the value of their coins, and contribute to a healthy crypto community.

They may enjoy faster transaction times relative to those offered by Proof of Work cryptocurrencies. For those who choose to stake on their own, the cost of setting up and running a staking node is far less than what you would need to spend on a Bitcoin mining rig.

Staking is also better for the environment. It reduces carbon emissions, energy usage, and electronic waste. Considering the current carbon footprint of Bitcoin is comparable to that of the entire country of Oman, that seems like a pretty big deal.

In other words, staking is profitable, efficient, and good for the environment. Sounds good, right? All that’s left is to get started.

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Amarpreet Singh

Amarpreet Singh

Startup Scientist who’s passionate about problems. Entrepreneur #Brandlitic + If you need Digital Marketing, SEO, Social Media, Motivation, hit [Follow]