If you are looking forward to generating additional income from your cryptos lying idle, this guide on what is staking in crypto and how does it work? is for you. Crypto staking can be a great source of passive income provided you choose the right crypto, the right staking platform, and the right staking method. Moreover, crypto staking is no rocket science.
In this crypto staking guide for beginners, we are going to break down all the technical aspects of crypto staking in simple words. So, what is staking in crypto? and how does staking in crypto work? Moreover, should you stake crypto to generate passive income? Let’s look for these answers in this crypto staking guide for beginners
- 1. What is Crypto Staking?
- 2. Crypto Staking and Consensus Mechanisms
- 3. How Does Staking Work in PoS?
- 4. How to Start Staking Your Crypto?
- 5. What is Liquid Staking?
- 6. How to Make Money Staking Crypto?
- 7. Benefits and Risks of Staking Cryptos
- 8. What is Staking in Crypto and How Does it Work? - FAQs
1. What is Crypto Staking?
When you hold stocks long enough, you get dividend income. Similarly, holding bonds makes you eligible for periodic interest income. Putting money into a savings account in your bank fetches you regular interest income too. Now, what if you want to generate similar passive income from cryptos? In that case, staking is the go-to tool for you.
In simple words, staking involves locking up your idle cryptos with a crypto platform for a particular period to earn rewards (also called staking rewards). So, why would a crypto platform pay you for locking up your cryptos with them?
The answer is that staking helps in validating transactions in a crypto platform, which keeps the blockchain up and working. In other words, staking is essential to the functioning of certain crypto platforms (especially the ones using the proof-of-stake (POS) consensus mechanism). Since staking helps in validating new transactions, stakers get a portion of the transaction fees earned.
2. Crypto Staking and Consensus Mechanisms
Cryptocurrencies have no central authority like a bank or a government agency. Cryptos works in a completely decentralized environment in which all transactions are recorded, maintained, and managed by the participating users. So, how do we ensure that all the recorded transactions in a blockchain are correct and reflect the true state of affairs?
This is where the role of the consensus mechanism comes in. In blockchain, the consensus mechanism works like a majority voting system to ensure that only correct data is recorded. To know more about consensus mechanisms, read our detailed guide on the differences between PoS and PoW protocols in our dedicated article.
Proof of Work (PoW) is the most well-established consensus mechanism in blockchains. Bitcoin, the first cryptocurrency, runs on the PoW protocol. PoW involves deploying sophisticated computer systems to solve complex mathematical puzzles to validate blocks on the blockchain. Therefore, PoW is extremely energy intensive and it has a very high carbon footprint. Moreover, you need expensive hardware and software to participate in the PoW protocol. The validation process using PoW is called crypto mining.
Growing criticism against PoW led to many blockchain platforms shifting to more energy-efficient protocols like Proof of Stake (PoS). For example, when crypto no. 2 Ethereum shifted to PoS in 2022, its energy needs fell by more than 99.98%. Which made buying Ethereum more energy efficient.
PoS involves the staking of cryptocurrencies by users to ensure that they have an incentive to act in good faith. Staking cryptos enables users to validate transactions on the blockchain. After each successful validation, users receive staking rewards. Therefore, staking helps in maintaining the blockchain while it is rewarding for users as well.
3. How Does Staking Work in PoS?
Staking tokens is done only in the blockchains run by PoS. On the other hand, cryptos run by PoW involve mining. This is why we mine Bitcoin, but there is nothing called Bitcoin staking. For more information on how does Bitcoin mining work, follow through the link to our article. Some of the prominent cryptocurrencies using PoS is Ethereum (ETH). Solana (SOL), Cardano (ADA) and Tezos(XTZ). Therefore, you can stake these cryptos to validate transactions and earn staking rewards. Ethereum staking is the most common among these different staking options.
When you stake a particular crypto, your tokens get locked in with the platform for a particular period. You cannot use your crypto assets in this lock-in period. When you stake your cryptos, you get a chance to validate transactions. You get rewards for successfully validating transactions on a blockchain. On the other hand, validation of wrong transactions leads to a penalty because of which you lose a part of the staked crypto. So, staking provides the right incentive for the participants to act by the book.
Staking helps in maintaining a blockchain. Since there is no central authority to keep a blockchain running, it’s the users who do it by validating transactions. Staking rewards provide economic incentives to users to put their time, effort, and computer resources into staking. Note that compared to PoW, PoS requires much simpler computer systems to validate transactions.
4. How to Start Staking Your Crypto?
Anyone holding a PoS-based cryptocurrency can get involved in staking. So, if you hold a certain amount of ETH, SOL, or ADA, it can be a great idea to participate in staking and generate some additional passive income. There are three primary ways to participate in staking. Let’s look at these staking methods:
4.1 Becoming a validator with a PoS-based blockchain
Firstly, this option is mainly suitable for experts and people who want to make significant investments. Plus, you need the required hardware, software, and technical knowledge about validating transactions. Moreover, you need to have a significant amount of crypto to become a validator and stake cryptocurrencies to validate transactions. For instance, if you want to be a validator with the Ethereum network, you need to have at least 32 ETH with you, which can cost about $70k as of December 2023. You can find more information on what is Ethereum and how it works on our website.
4.2 Joining a crypto staking pool
Many validators operate staking pools or staking networks that allow small investors to chip in their tokens. In staking pools, all the technical aspects of staking are taken care of by the validators. The participants get their regards in proportion to their contribution to the pool.
Joining the crypto staking pool suits small investors, as they can participate in the pools even without owning a significant amount of a token. Also, when you join a crypto staking pool, you don't need to own any software or hardware for validating transactions.
4.3 Staking cryptocurrency with an exchange
Most leading crypto exchanges like KuCoin and ByBit provide crypto-staking services. When you stake cryptos with them, you can earn a regular income based on your staked cryptos. Staking cryptos with an exchange is probably the most hands-off approach to stake cryptos and earn a passive income. Check out our review of KuCoin and discover what rewards you can claim with our KuCoin promo code in our dedicated article.
5. What is Liquid Staking?
As we just discussed, staking involves locking in your cryptos with a blockchain platform for a certain period. You cannot use your cryptos within this lock-in period called staking period. Therefore, staking essentially makes your crypto assets illiquid. To solve this problem, the concept of liquid staking has emerged.
In liquid staking, you can stake your cryptos with a platform and still be able to unlock its values. Practically, liquid staking platforms issue you new tokens based on your staked cryptos. These new tokens are redeemable for the original cryptos, and they can be traded like any other crypto assets. Liquid staking is getting increasingly popular because of resolving the liquidity issue in traditional crypto staking.
6. How to Make Money Staking Crypto?
Before proceeding, we want to highlight the resources we've developed to aid you in your crypto journey. Take a moment to explore our guide on crypto volatility, offering valuable insights into the dynamic nature of cryptocurrency markets.
Now, the primary reason you would like to stake cryptos is to earn staking rewards. Rewards from staking coins depend on several factors like the choice of crypto, staking protocol, transaction volume, number of stakers, and the staking platform.
When you choose to become a validator, you can validate blockchain transactions and earn staking rewards. These crypto staking rewards vary based on the cryptocurrency of your choice, the ongoing transaction fees, and the number of stakers. Also, when you choose to join a staking pool, you receive staking rewards in proportion to your total contribution to the pool.
Lastly, you are likely to receive a flat staking income when you lock your cryptos with an exchange for a given period. This flat return is adjusted periodically, and it’s often expressed in Annual Percentage Yield (APY). Depending on the crypto and the staking platform, APY can be as high as 20-35%. This means that at this rate when you stake cryptos worth $1,000, you are likely to earn a staking income of $200-$350.
Note that you would receive your staking income in the form of cryptos you staked. So, when you stake ETH, your staking returns will be received in ETH only. So, the value of your gain depends on the market value of the staked cryptos.
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7. Benefits and Risks of Staking Cryptos
The primary benefit of staking cryptos is to generate passive income. You can simply stake your idle cryptos lying in your wallets with an exchange and earn a fixed APY. Also, if your crypto appreciates within the staking period, your total gain becomes even larger. Moreover, you don't need any special skills or technical knowledge to gain from crypto staking. However, despite these many benefits, there are certain risk factors related to crypto staking:
- Risk of losing cryptos: When you stake cryptos, the rewards depend on the accuracy of the validators. So, when the validator makes mistakes in validating transactions, you stand a chance of losing your crypto assets.
- Volatility: Crypto is a highly volatile asset. Therefore, even if you earn a high APY from staking if your staked cryptos lose value in the market, your total gain from staking may be even negative.
- Fluctuating returns: Staking income depends on several factors like fluctuating transaction fees, the number of stakers, the market value of the staked cryptos, etc.
However, it's crucial to research and comprehend the risks before participating in staking activities. That is why our experts at JohnnyBitcoin are constantly working on providing you with the latest info and reviews, as well as the best bonus codes for crypto trading available.
8. What is Staking in Crypto and How Does it Work? - FAQs
8.1 ❓ Why stake cryptocurrencies?
The primary reason behind staking cryptos is to earn the staking rewards. Crypto staking is one of the most effective methods of generating a passive income from your idle cryptos.
8.2 ❓ Is crypto staking legal??
Crypto staking is an essential aspect of maintaining blockchains that run on PoS protocol. Therefore, crypto staking is not illegal in countries that allow cryptocurrencies to operate.
8.3 ❓ What are some of the leading cryptos for staking?
Some of the top cryptos for staking are Ethereum (ETH), Solana (SOL), Cardano (ADA), and Tezos (XTZ). All these cryptos run on the PoS consensus mechanism. This guide on what is staking in crypto and how does it work explains how to earn by staking these cryptos using several staking processes.