Did you know that the market value of the crypto staking sector reached almost $100 billion in the year 2022?
Despite the significant market crunch that wiped off billions of dollars from the crypto industry, staking still managed to generate a tonne of revenue.
In today's article, I’ll be showing you what staking is, what makes it profitable and how you can get started in it.
How does Staking work?
Staking is the process of locking up native tokens from a blockchain network for several days, in order for them to be used in transaction verification.
Staking helps provide blockchain networks with potential nodes, basically computers, that can verify transactions and forge new blocks.
This is the basis of a concept called Proof of stake - a type of consensus method used by blockchains to confirm valid transactions.
This Proof of Stake method differs from Proof of Work - a previous method which relies on computers solving difficult mathematical equations in order to win the right to forge new blocks of transactions.
Instead, Proof of stake relies on locking coins up for a period of time, called an epoch.
Stakers are rewarded for their contributions to their respective networks but can also be punished for bad actions such as fraud, by having their staked tokens deducted.
Anyone is allowed to stake tokens on a Proof of Stake blockchain, provided they meet certain requirements.
What are the requirements for Staking?
All proof of stake blockchains have minimum requirements that an individual staker must meet before they can participate.
These requirements vary across blockchains, but the most common requirement is a minimum amount of tokens being staked.
Each proof of stake blockchain has a minimum number of coins each node must hold before they can be selected as validators.
Like other factors, the number of coins varies across blockchains. Ethereum, for instance, has a minimum stake size of 32 ETH.
Holding the minimum number of coins also means the network has something to deduct from, if a node were to engage in fraudulent behavior, for example. This helps protect the network against theft.
Another requirement for staking is to have some technical knowledge.
A bit of technical knowledge is needed to properly set up the staking software.
While the technical knowledge required is not complex, the size and chances of rewards could potentially suffer if a node's staking software was misconfigured by mistake.
One more important requirement is a dedicated computer to serve as a node.
This simply refers to a computer you set aside for staking for proof of stakes.
While staking doesn't always require complex equipment, with some blockchains even allowing staking through smartphones, a dedicated computer offers advantages.
Setting one up helps to maximize staking rewards, which could be cut down significantly if the designated node becomes unavailable or offline.
Nodes which meet these conditions can then gain their chance to be selected, and participate in the transaction verification process.
How are Stakers selected?
The first thing that’s considered during selection, is the age and size of a particular node’s stake.
Some blockchains calculate the age and size of the stake held by each computer node before choosing which ones become validators.
This helps to reward nodes that spend more time and money staking on the blockchain, further encouraging long-term commitment.
Another aspect is an element of randomization.
Randomization is the most common factor used by Proof of stake blockchains when selecting validator nodes.
It’s designed to help maintain fairness and ensure that nodes with the largest stakes aren't always chosen.
Adding randomization makes it easier to prevent something called a 51% attack - a scenario where bad actors control more than 51% of the blockchain’s tokens.
By controlling more than 51%, it’s possible to misuse the consensus method described earlier - exposing a blockchain network to potentially fraudulent manipulation.
What are the benefits of Staking?
The first benefit is gaining access to a form of passive income.
Staking is a great way to earn extra income on the crypto you own, as all it really takes is to hold it in a locked pool for a while before getting a return.
As mentioned earlier, the market value of the crypto staking sector reached $100 billion in 2022, even despite market crashes.
The next benefit is a low barrier to entry.
Getting started in crypto staking is basically a straightforward process.
It doesn’t require a lot of technical knowledge, and most individuals with a good laptop can start staking tokens relatively quickly.
Another benefit is in helping support crypto projects you’re interested in.
Staking helps protect the network against bad actors and makes it easier to validate transactions.
A final benefit is that it’s more eco-friendly than the solutions which came before it.
Staking is a very eco-friendly alternative to Proof of Work - a consensus protocol that requires a lot of energy to process - typically from fossilized fuels.
With so many benefits, it’s easy to see why so many investors are getting involved with staking.
Are there any risks with Staking?
While staking has a lot of positive benefits, it still carries some risks which need to be addressed.
One downside is market volatility.
The crypto market is renowned for constant change, and even a little dip in coin prices can severely cut down the size of rewards earned from staking.
Another downside is liquidity risks.
Most staking platforms have a lock-up period in which users cannot access their funds.
This can become frustrating if the staker needs immediate access to their funds.
Finally, there are always cybersecurity threats.
The crypto industry is not new to hacking attacks and some staking platforms, including crypto exchanges, have fallen victim in the past.
As such, deciding to stake your coins comes with a risk of your funds being stolen, or getting your personal information leaked.
Still, with so many options out there in terms of coins and tokens to stake - there may be one suitable for you.
What are some popular crypto staking coins?
Crypto staking is offered by several proof of stake blockchains.
Ethereum is one of the best staking options for long-term investors at the moment.
It has the largest blockchain ecosystem out there, with the most decentralized apps on the planet.
Ethereum has a minimum staking requirement of 32 ETH, and its staking rewards can reach up to 5%.
It can be staked on exchanges like Coinbase and Binance US.
Cardano is one of the next largest proof of stake blockchains after Ethereum.
The most common staking platforms for Cardano include Binance, eToro, OKX, Daedalus, and Yoroi.
Other popular blockchains that offer staking include Solana and Polygon.
There are a couple of things to think about when choosing a blockchain for staking - as the process varies between blockchains.
For example - the epoch, or how long your tokens will be locked up for, varies greatly across blockchains.
Ethereum, for instance, has an epoch of 6.4 minutes while Cardano has an epoch period of 5 days.
Another feature that varies is the size of rewards.
While most blockchains set their staking rewards, it is still affected by market conditions which are constantly changing.
Conclusion
Crypto staking refers to locking up tokens in a pool for transaction verification. It is a great way to earn passive income, as stakers are rewarded with extra tokens.
Crypto staking helps the blockchain select what nodes will confirm valid transactions and add them to the blockchain.
Staking is relatively cheaper and easy to set up. It has several benefits, including low energy consumption and a passive income source.
Validators are chosen based on several factors, including age and size of stake combined with a randomization element. This way, most staker nodes in the blockchain can get an opportunity to validate transactions.
Nodes must possess a minimum number of tokens before being selected to validate transactions.
Staking comes with several risks, including constant sudden market movements which might reduce the size of stake rewards, cybersecurity hacking and theft.
Several blockchains employ staking, and how much a person earns can sometimes depend on the staking platform used.
The most common Proof of stake blockchains includes Ethereum, Cardano, Polygon, Solana, and many more. The most common staking platforms include crypto exchanges like Coinbase and Huobi.
