What Is Staking Crypto And How Does It Work?

One way to make money with cryptocurrency is to sell your investment when the market price increases. There are other ways to make money with crypto, like staking. With staking, you can put your digital assets to work and make passive income without selling them.

Crypto Staking is like putting money into a high-yield savings account. Banks lend out the money you put in, and you get interested in the money in your account. In theory, Crypto staking is similar to the bank deposit model, but the comparison only goes so far. Here’s what you should know about staking crypto.

What is staking crypto?

Staking crypto is when you lock up crypto assets for a certain amount of time to help keep a blockchain running. When you stake your cryptocurrency, you get more cryptocurrency in return.

Proof of stake is a common way for blockchains to agree on something. Under this system, network participants who want to validate new transactions and add new blocks to the blockchain must “stake” a certain amount of cryptocurrency.

Staking crypto helps ensure that only genuine transactions and data are added to a blockchain. Those who want to validate fresh transactions offer to stake cryptocurrency as protection.

They could lose some or all of their stake if they don’t do it right and validate bad or fake data. But if they ensure that transactions and data are correct and legitimate, they get more crypto as a reward.

Solana (SOL) and Ethereum (ETH), well-known cryptocurrencies, use staking to reach a consensus.

Evidence of stake validity

Proof-of-staking crypto grows a healthy ecosystem on their networks through staking. Most of the time, the bigger the stake, and the more likely validators will add new blocks and get rewards.

As validators get more stake delegations from more holders, this shows the network that the validator’s consensus votes can be trusted, giving their votes more weight in proportion to how much stake the validator has.

Also, a stake doesn’t have to be just the tokens of one person. For instance, a holder can join a staking pool, and the operators can do all the hard work validating transactions on the blockchain.

For validators, each blockchain has its own set of rules. For instance, Ethereum says that each validator must have at least 32 ETH. With a staking pool, you can work with others to stake less than that big amount. But one thing to remember is that these pools are usually built with help from outside sources.

How does crypto staking work?

Staking locks up your assets so that you can take part and help keep the blockchain of that network safe. Staking rewards are the cryptocurrency validators get in exchange for locking up their assets and helping to verify the network.

You can also set up a cryptocurrency wallet that lets you stake.

If your tokens are in one of these wallets, you can decide how much of your portfolio you want to stake. To find a validator, you choose from different stake pools. They combine your tokens with others to increase your chances of making blocks and getting Staking rewards.

How to earn by staking crypto?

When you pick a program, it will tell you what staking rewards it offers. As of December 2022, the cryptocurrency exchange CoinDCX offers a 5%-20% annual percentage yield (APY) for Ethereum 2.0 staking. To start, a user must put at least 0.1 ETH into the pool.

Once you decide to stake your cryptocurrency, you’ll get the promised return on time. The program will give you the return in the staked cryptocurrency, which you can then hold as an investment, stake again, or trade for cash and other cryptocurrencies.

What are the risks of betting on cryptocurrency?

Depending on the program, you might need to stake your tokens for weeks or months. During this time, exchanging or cashing out your tokens was impossible.

Still, you must find a willing buyer or lender since you are selling on a secondary market. Plus, there’s no guarantee you’ll be able to do that or get all your money back early.

Cryptocurrencies are also precarious investments. During market crashes, prices often change by tens of percent. If you put your cryptocurrency into a program that doesn’t let you out, you wouldn’t be able to sell when the price goes down. You could choose a staking platform that gives you good annual returns, but if the price of the token you staked goes down, you could still lose money.