Since the invention of cryptocurrencies, they have become an important investment tool for many mainstream investors. Digital assets have opened up a new financial system globally, not without risks. While their adoption increases sporadically, the option to earn from them remains abundant. One of the many low-risk options to earn from cryptocurrencies is staking. In this article, we will be looking into crypto staking and if traders can still leverage it to make profits in the market.
- 1 What Is Crypto Staking?
- 2 How Does Crypto Staking Work
- 3 What Cryptocurrencies Can I Stake?
- 4 How To Stake Crypto
- 5 Why Should I Stake?
- 6 Limitations Of Crypto Staking
- 7 What Happened To UST Stablecoin?
- 8 Is It Safe To Stake Cryptocurrencies When The Market Crashes?
What Is Crypto Staking?
Crypto staking involves investors committing their assets to support a blockchain while confirming the protocol’s transaction. It is how blockchains verify their transactions, allowing users to earn rewards on their stakes. It isn’t an alien concept for crypto investors, as they are familiar with it and earn rewards from it. This is why it remains one of the most preferred ways for crypto investors to earn passive income. The concept of staking belongs to cryptocurrencies that utilize the proof-of-stake (PoS) consensus mechanism. It is also worth noting that Ethereum is also transferring, via ETH 2.0, to a PoS model. Alternate to the proof-of-work (PoW) model, it is an energy-efficient model that is cheaper to operate. This is because the PoW model requires mining devices that use computing power to solve mathematical equations. However, while crypto staking is a straightforward concept, it is crucial to understand the PoS consensus mechanism.
How Does Crypto Staking Work
To understand how crypto staking works, it is first important to look into the PoS consensus mechanism. The proof-of-stake (PoS) is a consensus mechanism for processing transactions and creating new blocks in a blockchain. The model reduces the computational work needed to verify blocks and transactions. Alternatively, it is also a means of security for the blockchain network. This model is unique and changes the verification process of blocks, as it uses the token owners’ machines. Alternatively, token owners stake their assets as collateral to be able to validate blocks and can become validators.
In order to become a validator, the system randomly selects individuals who get the opportunity to become miners. The more coins you pledge, the more likely your chance of becoming a validator. The stake does not have to belong to one person, as validators primarily run a staking pool to raise funds from many token holders. The process in which this executes is via delegation, which is a barrier-free to entry process to entice others. To qualify as validators, token owners must also stake a minimum amount of coins. However, blockchains may use different PoS mechanisms for validating blocks. The mechanism is rewarding for validators, who earn a portion of transaction fees as rewards.
What Cryptocurrencies Can I Stake?
It is also important to mention that staked tokens are still the properties of validators. Therefore, they can always unstake them anytime, for trading or other purposes. Blockchain networks employ specific rules and penalties for offenders to ensure validators are compliant. If validators go offline for an extended period, they may face suspension and their stakes removed from the network. Alternatively, different networks also have individual minimum and maximum stake requirements for validators. For example, Ethereum’s PoS (formerly known as Ethereum 2.0) requires each validator to stake at least 32 ether.
However, it is important to reiterate that users can only stake in cryptocurrencies whose networks run on the PoS model. Examples of such cryptocurrencies include Ethereum (ETH), Cardano (ADA), Tron (TRX), EOS (EOS), Cosmos (ATOM), Tezos (XTC), LUNA (LUNA), etc. However, Ethereum’s model can currently mine and stake, despite transitioning gradually into the PoS model. In the future, mining on Ethereum will be phased out completely phased out as Ethereum will use a more energy-efficient system.
How To Stake Crypto
Staking cryptocurrencies is not difficult, as it is a straightforward process. It is also worth noting that top crypto exchanges like Kraken, Binance, and Coinbase offer staking opportunities in-house. Alternatively, staking-as-a-service platforms like EverStake, BlockDaemon, Figment, and MyContainer, offer users high staking rewards. However, you can easily stake your assets with the simple steps below.
1. Buy a cryptocurrency that operates the PoS model
It is important to note that not all cryptocurrencies offer staking. This is why you need to purchase a cryptocurrency that validates transactions via PoS. Learning vital things concerning cryptocurrencies is important, like how they work. Knowing other important aspects like staking rewards and the process is also key. After that, one can then go to an exchange and purchase the cryptocurrency. Cardano (ADA) is an eco-friendly cryptocurrency founded on peer-reviewed research and developed through evidence-based methods that allow staking. Polkadot (DOT), Solana (SOL), and many others are also good purchasing options.
2. Transfer your crypto to a blockchain wallet
After buying the cryptocurrency, it is immediately available in the account or a temporary wallet provided by the exchange. Exchanges like Binance and Coinbase have staking programs with some cryptocurrencies that come with rewards. If that’s the case, you can stake crypto directly on the exchange. However, if that option is not available, you will need a crypto wallet. Today, so many free hard and soft wallets are available to store crypto assets. Examples of such wallets included MetaMask, Trust Wallet, Electrum wallet, Ledger Nano X, etc. Inside your preferred wallet, choose the option to deposit crypto and then select the type of cryptocurrency you’re depositing. After that, a wallet address will be generated for usage in the future for other purposes. Alternatively, proceed to the exchange account and withdraw your crypto. Copy and paste that wallet address, and transfer your crypto from your exchange account to your wallet.
3. Joining A Staking Pool
The benefits of joining a staking pool cannot be underestimated, as it proves to be effective and less resource-consuming. A staking pool involves crypto traders combining their funds to stake with a better chance of earning rewards. Crypto traders can combine small units of their assets to enjoy large rewards. However, to join a staking pool is not so easy, as one needs to research basic things about it. Considerations like size, reliability, and operational fees, need to be known before joining one. In terms of reliability, one has to pick a pool with uptime as close to 100% as possible. This is because most pools don’t offer any rewards during downtimes.
For operational fees, one needs to pick a pool whose charges are reasonable. Typically, many pools charge a small percentage of staking rewards as a fee. So the pool of choice should not charge beyond the 5% fee, as the majority charge between 2% to 5%. Lastly, the pool size is a massive consideration as smaller pools are less likely to be chosen to validate blocks. However, the rewards are much when selected, as members are minimal in the count. Alternatively, with bigger pools, they have a high chance of being validators, with small rewards to share. However, mid-size pools are the best staking pools to join for most investors.
Why Should I Stake?
The benefits of staking are immense, as it is a rewarding activity if the outcome is as expected. Staking remains the easiest way to earn passive interest on crypto assets. The majority of blockchains offer annual staking rewards of up to 20%. Due to how easy it is, it also requires no technical knowledge or market skills. Unlike crypto mining, staking does not require any energy or power-based equipment. Staking also involves investors supporting a blockchain’s security and efficiency, which promises a long-term reward in the future. You can maximize rewards by staking in a pool with low commission fees and a good track record of validating plenty blocks.
Limitations Of Crypto Staking
Crypto staking is like an investment for returns and a high-risk activity. The volatile nature of cryptocurrencies means that they can drop drastically in price, which is terrible for staking. In this context, staking assets for the long term can outweigh the proposed returns. Another risk of staking is that some assets have a minimum lock-up period. This means that you cannot withdraw your holdings from staking until that period. Unfortunately, withdrawing your assets from a staking pool is not instant, as Blockchain networks possess a specific waiting period. However, some chains have an exception to this 7-day waiting rule. Lastly, there is a possibility that a staking pool faces hacking, which can result in the loss of both capital and rewards.
What Happened To UST Stablecoin?
After about two months of struggles, cryptocurrency prices fell beyond control last week. Bitcoin, Ethereum, and many other altcoins like $LUNA were severely affected by this collapse. However, the most unfortunate is the UST stablecoin, backed by the USD and expected to be equal to the currency. TerraUSD (UST), the largest algorithmic stablecoin, completely unraveled this week, sending ripples throughout the crypto markets.
The stablecoin fell far below $1 (bounced back shortly), adding downward pressure to Bitcoin and the cryptocurrency market when it crashed. Unfortunately, its sister token, Luna, also collapsed to nearly zero, losing 99% in a single day. Stablecoins are a unique digital asset that matches the price of a real-world asset. This was why the sharp collapse of UST, the stablecoin, and staking assets came as a surprise to all. It is important to examine if it is still safe to stake cryptocurrencies after the last collapse of UST.
Is It Safe To Stake Cryptocurrencies When The Market Crashes?
The recent crash of UST (which is back to correction) remains a turning point in the crypto staking and market. However, crypto staking remains the best option for investors who have assets that they do not want to trade presently. Crypto staking is beneficial because they do not have to worry about the performance of the asset but the project. However, it is only reasonable to buy crypto for staking, except if one believes it’s an excellent long-term investment.
Surprisingly, when the market is down, some investors believe short selling with the least leverage is the best thing to do. However, while that remains a high-risk commitment, staking possesses more potential for returns. Alternatively, for some investors, when the market is down, they prefer to trade their assets. Trading your assets when the market is down can allow you to make the biggest profit if appropriately executed. However, the returns might not match that of stake in the long run. In conclusion, while other options may be glittering during a crash, the best bet remains at stake, as it relies on the project’s performance.
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