What Is Staking in Crypto and How Does It Work?

Crypto staking is one of the best ways to put your money to work for you. If you want to learn how to make money staking crypto, this is the place to be — our team of experienced crypto enthusiasts has created a guide in which we’ll explain what staking is, how it works, how to stake crypto, and more.

Furthermore, you’ll find out what Proof-of-Stake is and which cryptocurrencies are available for staking. We’ll end the guide by listing the main advantages and disadvantages of staking crypto.

What Is Crypto Staking?

So what is crypto staking? Staking is the process of locking up your cryptocurrencies to support the operation, security, or liquidity of a blockchain protocol. In exchange, you are given some kind of reward, usually more tokens. The goal of most staking is to contribute to the creation of new blocks and the security of a Proof-of-Stake (PoS) blockchain network like Ethereum. However, there are many different decentralized finance (DeFi) apps that let you deposit tokens into smart contracts to earn rewards through liquidity pools or yield farming. 

How Does Staking Work?

Staking is central to all Proof-of-Stake blockchains from Ethereum to Solana and everything in between. Users lock a certain amount of crypto in a wallet to help support the operation and security of the blockchain network and are rewarded with more tokens. This is most common in PoS networks, but there are other kinds of blockchains that use similar mechanisms.

In a typical PoS consensus system, the network picks validators to confirm transactions and bundle them into new blocks to add to the blockchain. In most PoS networks, the more tokens a user stakes, the higher the chances of being chosen as a validator and earning rewards. This is somewhat similar to Proof-of-Work (PoW) consensus mechanisms which favor miners with the most computational power. This makes it so that changing the network unilaterally requires an incredible amount of the token (or computational power in PoW networks).

With each addition of a new block, new tokens are produced and allocated to validators in the form of staking rewards. It’s important to note that users will also have to make a minimum deposit to run their own staking node, depending on which network they are staking on. For example, the minimum deposit for staking Ethereum is 32 ETH. However, users can also choose to stake through staking platforms that pool together crypto, eliminating the steep cost of entry.

Staking can be direct or indirect. If you have 32 or more ETH, you can run your own validator node, which is considered direct staking. On the other hand, if you use a staking platform to pool your ETH with other users, that would be indirect staking.

Indirect staking can also be divided into custodial and non-custodial staking. Custodial staking allows the node operators to receive a reward even if they are not validators, while in non-custodial staking, staked tokens belong to delegators.

How to Stake Crypto

You can start staking tokens through a crypto exchange, a staking pool, or by creating an account on SaaS platforms.

Staking Through a Crypto Exchange

Likely the easiest way to get started staking crypto is to choose a centralized crypto exchange that has a built-in staking feature, such as Binance, Kraken, and Coinbase. The main downsides of this is that these platforms often take a cut of the rewards and you have to entrust them with your crypto. Once you have selected the best crypto exchange for you, create an account and link it to your crypto wallet.

Buy a cryptocurrency that can be staked, go to the staking page, and enter the amount you would like to stake. Some crypto exchanges will have minimum deposit requirements.

Staking Pools

Staking pools are networks in which stakers collectively lock their coins in fund pools. In this way, they jointly contribute to creating new blocks and generating rewards. The bigger the pool, the bigger the stake rewards. These pools usually charge fees that vary from 5% to 10%.

To stake crypto via staking pools, users must first transfer the desired digital currency to their wallet. After that, they have to choose a staking pool to which to send their cryptocurrencies.

Staking-as-a-Service Platforms

SaaS platforms are intermediaries between cryptocurrency owners and blockchain consensus. These platforms allow users to stake their tokens and gain rewards through network fees.

To stake crypto via SaaS platforms, users must create an account and connect it with their wallet. After that, they must enter the desired amount and tap the “Stake” button to confirm their choice. 

What Is Proof of Stake?

Proof of Stake or PoS is a mechanism used to maintain the functionality, integrity, and security of the blockchain network. It was created as an alternative to the Proof-of-Work mechanism in which transactions are confirmed by validators and not miners. Instead of requiring absurd amounts of energy and advanced computing hardware, PoS staking only requires minimal hardware and a bunch of tokens. 

This model was also developed to provide better rewards and stricter penalties for those who try to cheat the system.

After cryptocurrency owners create validator nodes, PoS will select one node to validate block transactions. If the transactions are valid, the block will be added to the network, and the user will be rewarded. On the other hand, if the validator presents incorrect information, they will be penalized by losing part of their staked holdings (called slashing).

What Are the Benefits of Staking Crypto?

Now that we have crypto staking explained, here are the main reasons why you might want to start:

Earning Passive Income

You can earn passive income by keeping your cryptocurrencies locked in the blockchain network. This is especially useful for investors who believe that the value of a particular token will increase in the future.

Keeping the Blockchain More Secure

Staking helps secure the blockchain network in several ways. First, it promotes decentralization by encouraging wider participation than even PoW consensus mechanisms. Secondly, staking can prevent Sybil attacks since validators must stake a minimum amount of tokens. Additionally, most staking protocols punish users who act maliciously by slashing part  of the offender’s staked funds.

Contributing to Sustainability

Staking has become an alternative to mining as it drastically reduces energy consumption without meaningfully sacrificing security or decentralization. Staking doesn’t require specialized hardware, which makes it cheap, accessible, and more eco-friendly.

Increased Coin Value

When users stake a bunch of their tokens, the supply of the token could substantially drop. This could ultimately help increase its value over time due to simple supply and demand dynamics.

What Are the Risks of Staking Crypto?

Here are the main disadvantages of crypto staking that you need to know before getting started:

Loss of Invested Money 

Just investing in crypto at all carries the risk of losing your investment because they are volatile assets. This risk is even greater for stakers as you are locking up your funds, often for a predetermined amount of time.

Slashing Risk

No matter if you set up your own node or pool your resources with other users in a community node, there will always be a risk of slashing. Slashing is the penalty that occurs when a validators behaves maliciously or just fails to follow the network’s rules. For example, a validator could be slashed just for going offline for too long. 

Risk of Hacking

If there’s an attack on the network, stakers could lose all of their funds. That’s why it’s vital to only use trustworthy platforms with strict security measures and a history of extensive security audits. 

What Cryptocurrencies Can You Stake?

Not all cryptocurrencies can be staked. In general, you can only stake coins that use a PoS or similar consensus mechanisms. Currently, around 140 digital currencies use the PoS consensus. The most popular include:

• Ethereum (ETH)
• Binance Coin (BNB)
• Cardano (ADA)
• Avalanche (AVAX)
• Polkadot (DOT)

That said, Bitcoin staking is not possible since this cryptocurrency uses the PoW consensus, which doesn’t allow staking. Apart from BTC, you won’t be able to stake around 160 other cryptocurrencies, such as:

• Dogecoin (DOGE)
• Litecoin (LTC)
• Bitcoin Cash (BCH)
• Monero (XMR)
• Dash (DASH)

Note: Some DeFi platforms offer different kinds of staking that allow you to stake some non-PoS coins to power liquidity pools, yield farming, lending, and more. While this resembles PoS staking, it incurs additional risks so always do your own research before you locking up your tokens.

Conclusion

Crypto staking isn’t going anywhere. It’s a brilliant concept and a classic ‘win-win’ for developers and users. Compared to PoW mining, it offers a much more accessible (not to mention more eco-friendly) alternative that the vast majority of new projects are adopting because of its many benefits. 

For many long-term investors with strong beliefs in certain PoS coins, staking can be a great way to put their coins to work and earn a steady passive income. However, it’s vital to understand the risks from basic market volatility and token lock-up periods to major hacks and slashing before you dive in headfirst.

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