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What Is Crypto Staking: Rewards, Benefits, Risks?

Crypto staking can be complex. But we’ve simplified it in this blog that will tell you all about crypto staking and how it works.

Priya Bansal

Gone are the days when crypto was just about buying and selling. Investors can now earn passive income and rewards with relatively simple methods like crypto staking. 

In fact, data suggests that crypto staking rewards can be lucrative (~11% on average) based on an analysis of 260+ staked assets (as per a Coindesk article). 

Let’s explore what it means to stake crypto and how it works.

What Is The Meaning Of Crypto Staking?

Staking is a method in which you put your cryptocurrencies on the line (at stake) by locking them away for the long term. In return, the platform will help you earn staking rewards which are returns on a deposit.

But you’re not the only one who is benefitting from staking crypto, the platform is too. The platform’s blockchain will put the staked crypto to work to validate transactions, retain integrity, and maintain security. 

Staking is becoming popular because it is viewed as a win-win for everyone involved. Instead of lying dormant in your wallet, the cryptocurrencies are put to use to ensure that:

  • You earn profits in the form of more crypto
  • Staking rewards are generally lucrative (~11% on average)
  • Blockchain transactions become efficient
  • The security of the blockchain is solidified
  • The community works towards common goals 

You’ll notice that crypto staking is similar to any fixed-income product like a bank deposit or P2P lending. While this is true to some degree, there are finer details that make crypto staking more interesting.

How Does Crypto Staking Work?

There are three things that make crypto staking possible. First is the cryptocurrency’s ability to force participants to have skin in the game with the promise of commitment in exchange for staking rewards.

This stems from the fact that there are benefits to having skin in the game. It ensures that there’s fairness and integrity. Furthermore, the staking rewards have to be lucrative (who doesn’t want more money?).  

Most platforms levy a minimum staking amount so there’s sufficient skin in the game. Ethereum, for example, requires you to stake a minimum of 32 Ether (~$105,785). 

The second is the blockchain platform itself. If the project is solid and its blockchain can effectively put the staked crypto to use, everybody goes home happy. This also builds trust and a sense of community.

Several platforms offer “staking pools” so that investors can join hands and increase their staking power. More assets staked means more computation power for the platform and more rewards for participants.

Lastly, not every cryptocurrency can give you access to staking. Only those that have adopted a “Proof-of-Stake” mechanism can help you earn staking rewards. 

What Is Proof-Of-Stake?

A “Proof-of-Stake” is a consensus mechanism that allows distributed ledgers in a blockchain to work together and reach an agreement. Let’s understand what this means step by step. 

Consensus means mutual agreement. Since there are several distributed ledgers in a blockchain’s network, all of them have to agree on what’s the current state of the network to prevent wrongdoings.

A consensus mechanism is a method that a blockchain network uses to reach an agreement. Of the multiple consensus mechanisms that are available, Proof of Stake is what interests us for crypto staking.  

Proof of Stake requires investors to stake their crypto to become validators. Their crypto will be put to use in order to order transactions and create new blocks of tokens. 

All of this is done to ensure the blockchain reaches a consensus. Note that PoS is different from PoW (Proof-of-Work) that Bitcoin uses. PoW doesn’t have the ability to enable staking. 

Moreover, PoS is energy efficient, doesn’t require elite hardware, fares better against centralization, and accelerates scalability compared to the PoW consensus mechanism. 

Benefits Of Crypto Staking

  • Attractive Rewards: The returns or yields as they’re called in crypto staking are known to be lucrative.
  • Passive Income: Earning staking rewards is considered to be a solid way to put otherwise inactive crypto to use for the long term. 
  • Everybody Wins: When you stake crypto, you participate in boosting the blockchain network’s efficiency and security.
  • Efficient: PoS is far more environmentally friendly than PoW where miners use expensive electronic rigs to create new blocks of cryptocurrencies. 

Risks Of Crypto Staking

  • Mandatory Lock-In: Any investment that has a lock-in carries some degree of worry. 
  • Project-Dependent: Your money through crypto staking will be at the mercy of the project’s strength and ability to attract more investors. 
  • Volatility: Regardless of how good a crypto project is, it may be subject to the volatility that plagues even the biggest of the lot like Bitcoin. 
  • Diminishing Returns: Volatility means that you run the risk of receiving rewards that may be worth less than your initial investment. 
  • Staking Pool Risks: If the staking operator isn’t good at their job or the staking pool gets hacked, you’ll be at the risk of losing a part or whole of your staked cryptocurrencies. 

Did you know? You can nominate yourself as an advisor if you stake your TIKKA Tokens! 

Top Crypto Staking Coins

Here is a list of crypto staking coins that have been known to generate attractive rewards. The data below was taken from cointostake dotcom.

Note: Facts & figures are true as of 06-06-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in unregulated assets like cryptocurrency.

Priya Bansal

Curious about personal finance and all things money. Can either find me reading a book or dancing to a tune.

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