What is staking crypto?

staking crypto
What is staking crypto?

If you are attracted to investing in crypto, staking is a notion that you are probably familiar with already. But just in case you are new to the field and wish to familiarize yourself with the concept, we will provide you with some brief notes that you need to know.

Staking is the method that various cryptocurrencies use to verify the transactions on their network; it also allows participants to earn rewards on the assets they hold.

Staking is a procedure that involves committing your cryptocurrency assets to support a blockchain network and authorize transactions. Staking can be a way to use your cryptocurrency for bringing passive income, mainly since some cryptos offer high-interest rates for staking. Before starting, it’s crucial to understand how crypto staking works precisely.

staking crypto

What is cryptocurrency?

Cryptocurrency is a digital currency. These currencies are decentralized, and they are based on blockchain technology (a distributed ledger). These digital currencies are generally not issued by any central authority, making them theoretically immune to government manipulation or interference.

We call them cryptocurrencies because cryptography secures them. If you would like to learn more about the concept of cryptocurrency, you can see our related article on the Bitunivex website.

What is the difference between staking and mining?

If you already know everything you need to know about cryptocurrencies, you might want to know about staking. Usually, cryptocurrencies either use PoS (Proof of stake) or PoW (Proof of work) to secure their blockchain (there is a less common mechanism called proof of burn). In the following section, we wish to go into detail about staking and mining.

What is mining crypto?

You can start mining coins or tokens on a network via a computer with mining software and an internet connection. But can anyone do it? Mining needs technical knowledge and computational power to solve the algorithmic puzzles in blockchain networks.

Mining is easy at first, but as it goes forward, the puzzles become more complicated and, therefore, more complex and time-consuming to solve. There are currently computer farms worldwide that work around the clock to mine coins.

Mining on networks that use PoW (proof of work) takes more power and time than mining on PoS (proof of stake).

smart contract

What is farming crypto?

Yield farming (liquidity mining) creates crypto from your cryptocurrency holdings; this is a method of making your cryptocurrency. This process involves lending assets for profit to DeFi (Decentralized Finance). Next, these DeFis lock those assets in a liquidity pool, which locks them up in a liquidity pool, mainly a smart contract for holding assets. These assets or funds are used to facilitate trading, lending, and borrowing. The platform receives fees given to investors (according to their share of the liquidity pool).

What is staking crypto?

What is staking crypto? In cryptocurrencies that use the PoS model, staking allows new transactions are added to the blockchain.

Staking is supporting a blockchain network and partaking in transaction validation by committing your crypto assets to that network. Staking is purchasing crypto, intending to hold it for an indefinite time. It is somehow like when you deposit money at the bank for a specific time and get your profit at the end of the month with the difference that the amount of profit you take out of staking depends on the price and the amount of the crypto you have decided to stake.

How can I stake my cryptocurrency?

First, users pledge their coins to the cryptocurrency protocol. The protocol chooses its validators among the users to confirm blocks of transactions. The more coins you commit, the more chance of success you have to become a validator.

Whenever a block is added to the blockchain, new coins are minted and distributed as staking rewards to that block’s validator. Usually, the reward they earn is the same type of crypto they are staking. Although, some blockchains use a different kind of cryptocurrency for rewards.

If you want to stake crypto, you must first own crypto that uses the PoS model. Then you can select the amount you want to stake. You can stake your crypto on many popular cryptocurrency exchanges.

When you stake your coins, you still own them. If you trade them, you can also unstake your asset later on (which may not be immediate). You need to stake coins with some cryptocurrencies for a minimum of time.

After you purchase your crypto, it will be transacted to the exchange where you bought it. Some exchange platforms offer their staking programs with specific cryptos. If that is the case, you can stake directly on the exchange platform.

Otherwise, you have to move your assets to a blockchain wallet (crypto wallet). There are two kinds of wallets available: software wallets and hardware wallets. After you get your wallet, select the option to deposit coin and then choose the type of cryptocurrency you are depositing. Now you have your wallet address. Go to your crypto exchange account and select the option to withdraw your asset.

Copy and paste your wallet address to transfer crypto from your exchange platform to your wallet. REMEMBER ONLY TO COPY AND PASTE IT TO AVOID ANY MISTAKES IN THE ADDRESS.

Staking crypto

If the token/coin you have allows staking, you can stake an amount of your asset and earn passive income; this takes place in a staking pool, and you can make about 5 to 20% per annum on the number of coins you stake.

Let’s go through the steps once more:

1- Choose a PoS crypto

2- Research the minimum amount of coin/token you need to stake

3- Make a crypto wallet

4- Offer your coins for staking

What is the difference between PoS and PoW?

Proof of stake and proof-of-work are two different mechanisms used on blockchains. These programs secure the network from possible threats like cyber-attacks. Let’s go through them and learn the differences.

Proof of Work

Markus Jakobsson and Ari Juels coined this term during a document published in 1999. Proof of Work (PoW) is a protocol intended to form digital transactions securely without having to put your trust in a third party. This protocol generates puzzles and rewards those who solve them, which is done by computers and is called mining. In other words, this is an algorithm that aims to verify transactions and get new blocks added to the blockchain. Bitcoin is the first crypto that uses this type of mechanism since it believes that PoW is more secure than other mechanisms. You can see the advantages and disadvantages of this method:

1- It reduces the risk of attacks by 51% because it is very complicated.

2- No one (out of miners) can control the BTC network alone based on Hashcash PoW.

3- Before proposing a new block, miners have to present proof that they have done some work.

4- The community can easily verify each solution, making it simple to check all transactions for trustworthiness.

5- It also limits how new blocks can be made. (e.g., miners can create a BTC block every 10 minutes)

6- This method does not rely on a third party transaction; therefore, it is a transparent and trustless network

Proof of Stake

PoS is a consensus algorithm that chooses who validates the next block, giving how many coins you hold, instead of miners solving cryptographic puzzles by computing power to verify transactions like Proof-of-Work. These are the features of PoS:

1- Users have a higher chance to become a validator based on the amount they decide to stake.

2- Validators do not get a block reward; they earn network fees as their reward.

3- It handles the transactions faster, and the mining process takes less energy than PoW.

staking crypto

Crypto staking on PoS or PoW

Many cryptos use the PoW (Proof of work) model to add blocks to the blockchain. Bitcoin and some other cryptos use this type of model, but the problem with this model is that it requires considerable computing power. Usage of this model has led to significant energy usage from cryptocurrencies that use PoW.

PoW, on the other hand, does not need as much energy, which makes it a more scalable model that can manage more transactions. Staking is an option accessible on the networks that use PoS.

Staking rewards

Why does the platform reward us for staking? Because the blockchain puts the asset, you hold to work. They use a consensus mechanism called PoS (proof-of-stake) to ensure all transactions are secure and verified.

Your crypto also becomes a part of the process if you have staked it. Cryptos such as Solana, Polkadot, Ether, and Cardano currently allow staking.

Stakers earn a reward based on the amount of crypto they stake.

Do all cryptocurrencies have staking?

The answer is no. But how can we know? Those networks that use the PoS consensus mechanism offer staking options to their users. Many networks do not offer to stake; therefore, you have to check it out on their network first.

Best Way to stake crypto

Staking cryptocurrency may seem a little baffling the first time around, but it’s a simple procedure once you figure it out. Start educating yourself about crypto, PoS mechanism, wallet, and transfers to get the hang of staking. Next, go ahead and choose the crypto you would like to stake.

Now it is time to choose a reliable, safe, and secure cryptocurrency exchange platform that meets your requirements and provides good customer service. If you want to find one in Australia, you can check out Bitunivex, a global exchange platform. Bitunivex works with both fiat and crypto and, most importantly, offers a wallet so you can easily take care of your transactions.

Is staking Safe?

Investing in any market comes with its upsides and downsides. Here we wish to show you both sides of the story when it comes to staking so you can go into the field with enough knowledge:

Benefits of staking crypto:

1- It is an easy way to make profits on your holdings (in some cases even more than 10% or 20% per year)

2- You do not need any special equipment

3- You are helping to make the network safer and more secure

4- It is more environmentally friendly than crypto mining.

Risks of staking crypto:

1- Coin/token prices are unstable and might drop; this could outweigh any interest you earn on them.

2- You might have to lock up your money for a while.

4- Unstaking your crypto might take a while (about a week).

staking crypto

Best Staking projects of 2021

Here are the three top staking projects in the year 2021:

1- Synthetix network: SNX was put in first place after being with under 35% of the total vote is staking project. It started initially as Havven; then, it rebranded to Synthetix in 2018.

2- Polygon (Matic): It is in second place in the staking project vote. Formerly known as Matic Network and launched in 2019, Polygon has blasted in popularity.

3- Cosmos (ATOM): It is in third place with just below 15% of the total. It came out in 2017; the Cosmos ICO raised a little more than 17 million dollars.

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