What to know about staking — the process of locking up crypto holdings to earn rewards and interest

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While many crypto investors mine in order to gain more assets, there is another option available to some investors: Crypto staking. 

Crypto staking involves “locking up” a portion of your cryptocurrency for a period of time as a way of contributing to a blockchain network. In exchange, stakers can earn rewards, typically in the form of additional coins or tokens. 

What is crypto staking? 

Crypto staking is similar to depositing money in a bank, in that an investor locks up their assets, and in exchange, earns rewards, or “interest.”

“Staking is a term used to refer to the delegating of a certain number of tokens to the governance model of the blockchain and thus locking them out of circulation for a specified length of time,” says Nicole DeCicco, the owner and founder of CryptoConsultz, a cryptocurrency consultancy in the Portland, Oregon area. 

A particular network’s protocol locks up an investor’s holdings — similar to depositing money in a bank, and agreeing not to withdraw it for a set time period, which benefits the network in a couple of ways, according to DeCicco.

First, this can increase the value of a token by limiting the supply. Second, the tokens can be used to govern the blockchain if the network uses a proof-of-stake (PoS) system. A PoS system — as opposed to a proof-of-work (PoW) one, which incorporates “mining” — can be fairly complicated, especially for crypto newcomers.

In PoS systems, coins are staked to forge new blocks in the blockchain, for which participants are rewarded. “Winners are selected through randomization, ensuring no single entity will gain a monopoly over forging,” says DeCicco.

The process is simplified for crypto exchange users, says Jeremy Welch, chief product officer at Kraken, one such crypto exchange. On Kraken, Welch says staking is as easy as “going to the staking page [on the user’s interface], specifying the amount you want to stake, and hitting submit.”

Welch also says that setting up a staking system on your own can be quite difficult. “You need to maintain and run a node yourself. And you need to know the crypto’s infrastructure,” he adds, which may require background knowledge many investors won’t have.

Depending on how much of their total holdings are being staked, and the length that they’re being staked for, a staker can earn a proportional reward by forging. Stakers can also pool their holdings to meet any required minimums, too, into a “staking pool.” It’s also possible to “cold stake” on some networks, which involves staking coins or tokens that are held in a “cold” wallet, or one that is kept offline. 

Coins you can stake

While not every cryptocurrency can be staked, most can. For instance, DeCicco says that seven of the ten most popular current coins can be staked. Here are some examples:

  • EthereumPreviously employed a PoW system, Ethereum is now moving to PoS. To stake Ethereum on your own, you’ll need a minimum of 32 ETH to become a validator, and you’ll then “be responsible for storing data, processing transactions, and adding new blocks to the blockchain,” according to the Ethereum site.
  • Cardano: Investors can also delegate Ada — the Cardano network’s cryptocurrency — to staking pools to earn rewards. Cardano users can even set up their own staking pools, too, assuming they have the technical know-how to create and administer one. 
  • Solana: Solana, or SOL, can likewise be staked or delegated to a staking pool, assuming an investor uses a digital wallet that supports it. From there, it’s a matter of selecting a validator and deciding how much you’d like to stake. 

Staking rewards 

There are many benefits and rewards to staking. Here are some of the most prominent:

  • Earn additional tokens. This is the big one — increasing your individual stash of tokens or coins. Stakers aren’t guaranteed anything, as the process of forging new blocks and doling out rewards is randomized, but stakers do “earn interest,” so to speak, by staking. 
  • Staking is less resource-intensive. As opposed to crypto mining, staking consumes far fewer resources, which may help you sleep at night. Plus, staking is “servicing the ecosystem by making tokens more rare,” says DeCicco, which can increase the value of your holdings.
  • Stakers get voting rights and participation. As mentioned, stakers are more entrenched in a specific ecosystem or blockchain network, which may give them more clout as to what happens next with a specific cryptocurrency. “It’s similar to owning stock in a company. By staking, you’re getting voting rights,” says Welch. 
  • Staking can be an easy way to grow holdings. For investors using an exchange, staking can be as easy as toggling a few switches to set things up. From there, they can watch their holdings grow. It’s a hands-off, easy way to keep investing, while putting in very little effort.

Risks of staking 

As with any type of investment, staking has its risks. While it’s unlikely that you’ll see your entire account go kaputz overnight, as may happen with certain stocks, there are some things to be aware of before you start staking: 

  • Crypto is volatile. First and foremost, cryptocurrency is a volatile investment, and as such, price swings are common. The volatile nature of crypto and corresponding price swings can have you rethinking your strategy on a daily basis — so, volatility is something to keep in mind. 
  • Lock-up periods. Staking involves locking up your funds for a period of time, and if you lock up your holdings for months (or years), you won’t have access to them for some time. Also important: There may not be a way to “unstake” your holdings once you start.
  • Beware of “slashing.” If you’re staking outside of an exchange, by setting up and configuring your own node, you may make a mistake and incur penalties. This is called “slashing,” and is used against “validators that are performing poorly or dishonestly,” says Welch. The result? “A portion of the funds can be taken as a penalty,” he adds.
  • Fees. Yes, there are fees associated with staking, particularly if you do so through an exchange. The fees vary by exchange, but Welch says they’re typically a percentage of a staker’s rewards.

The financial takeaway

Staking can be a good way for crypto investors to put their holdings to work, earning them interest and rewards. Plus, it can get you involved in the governance and validation side of blockchain networks, which may be something of interest to certain investors. 

It may be useful to think of staking as owning a stock and earning dividends, or even putting money in a bank account and earning interest. It can be a relatively low-lift way to grow your account, but be sure to do your homework, and know the risks of staking before starting.

Source: https://www.businessinsider.com/