Understanding Staking: A Key Concept in Cryptocurrencies Explained

Quick Links

• Proof-of-Stake vs. Proof-of-Work
• Dive Into Staking Pools
• Warning: Words of Caution
• How to Start Staking Today

Proof-of-stake blockchains offer cryptocurrency investors another way to earn some extra cash. However, staking isn’t a risk-free investment: There are some things to keep in mind. Here’s how it works.

Proof-of-Stake vs. Proof-of-Work

Proof-of-work cryptocurrencies, like Bitcoin, utilize mining . Those with the most computing power have an upper hand on earning the reward that comes with creating the next block on the blockchain .

Staking eliminates this barrier and allows all users to participate. Instead of miners, proof of stake blockchains have validators. A proof-of-stake consensus mechanism requires validators to stake their cryptocurrency. Staking is essentially collateral. By staking their cryptocurrency, validators have a chance at earning a reward that comes with the creation of the next block in the blockchain.

Related: Proof of Work vs. Proof of Stake: What’s the Difference?

Each cryptocurrency has varying rules required to stake cryptocurrency. The requirements pertain to how long and how much cryptocurrency has been staked. Validators who stake more crypto for a longer amount of time increase their chances of earning the reward that comes with creating the next block.

Dive Into Staking Pools

It may seem that the proof-of-stake system could lead to validators with the most cryptocurrency earning the block reward more often. However, proof-of-stake blockchains allow participants with less cryptocurrency to earn rewards as well. Owners of proof-of-stake cryptocurrencies can pool together their holdings to increase their chances of earning a reward. These are known as staking pools.

Those looking to use a staking pool should keep a few things in mind: The best way to stake is with wallets or exchanges . Remember that holdings kept on exchanges are not technically in your control. Exchanges have been notorious for getting hacked. Using a wallet would be similar to taking your money out of the bank and putting it under your mattress. Your wallet, your money.

Proof of stake cryptocurrencies have ushered in a new era of income-generating assets. A few of the most prominent proof of stake cryptocurrencies are Ethereum , Solana , Cardano , Tezos , Algorand , Avalanche , and Polkadot .

Warning: Words of Caution

To be clear, this is not investment advice and we are not recommending you invest in cryptocurrency or begin staking. You do so at your own risk.

If you are thinking of staking, be aware of those lesser-known cryptocurrencies offering extremely high interest rates. They tend to not have a great track record and are more susceptible to prices crashing. Sometimes that 20% interest rate is too good to be true.

Before staking a certain cryptocurrency, ensure that you are aware of how long and how much crypto you must stake. For example, Solana that is staked must be locked for roughly two days. Each cryptocurrency has different minimum staking periods. It can be a helpless feeling seeing a cryptocurrency price plummet and not being able to sell.

How to Start Staking Today

The simplest and most secure way to start staking is with a wallet. Some of the most used wallets for staking are Atomic Wallet or Exodus . These wallets have user-friendly interfaces that make staking easy. They support a broad range of the more prominent cryptocurrencies that can be staked. Both are available for iPhone or Android users, too.

Exchanges can also be used. Coinbase , Binance , Gemini , and Crypto.com are some of the most popular exchanges for purchasing cryptocurrencies. Fortunately, they also offer users a variety of cryptocurrencies to stake as well. Just remember that even holdings staked on an exchange are at risk compared to wallets.

Staking is a simple innovation that rewards users of proof-of-stake blockchains. Those interested in staking can earn passive income with minimal time and energy. Staking is a viable way to put your money to work while you wait for your favorite cryptocurrency’s price to increase.

As with everything cryptocurrency, just be sure to keep the risks in mind.

Also read: