Is crypto staking worth it? Meaning, risks and how to make money
As a simpler and less labour-intensive alternative to cryptocurrency mining, staking in crypto is gaining prominence among diverse groups of financial investors.
This article defines crypto staking, how it works, and whether it is a profitable DeFi venture.
What is staking in crypto?
Staking in crypto is the process by which cryptocurrency owners use their coins to add new blocks to the corresponding blockchain and receive additional coins in exchange.
Staking is also the process of limiting the commercial use of cryptos for the purpose of earning rewards.
Today, staking is especially relevant for blockchain-based virtual currencies. The "Proof of Stake" is the foundation of the entire crypto staking strategy and must be understood by anyone who has not yet figured out how the staking principle is designed and what returns are possible with it.
Staking in crypto is seen as a potential method for investors to create exceptional revenue from their cryptocurrency assets while retaining ownership. In addition, it is unaffected by any potential price increase of the coin or token.
In this type of investment, cryptocurrency holders use their digital assets to update the blockchain in exchange for a reward.
In summary, staking in crypto involves investors using their existing coins or tokens to contribute to the operation of a blockchain network by making them accessible; in exchange, the owner receives compensation for them. Profits derived from crypto staking are comparable to the distribution of dividends in publicly traded corporations.
How does crypto staking make money?
The central concept of staking in crypto is that participants can lock up a certain amount of coins (their "stake"). Afterwards, and at specified intervals, the protocol randomly assigns one of them the responsibility of validating the subsequent block.
Typically, the probability of being chosen is proportional to the number of coins: the greater the number of coins deposited and secured, the greater the likelihood of being chosen. Randomness makes it more difficult to manipulate the results of crypto stakes. This method resembles a lottery in that the number of cryptos held corresponds to the number of lottery tickets.
Each participant may also delegate their voting rights and passive income to a "trusted third party" through staking. In exchange for their votes, these delegates receive all block validation rewards and pay their voters a dividend.
Can you make money staking in crypto?
Random selection guarantees that investors may contribute to the processing volume of blocks by making their currencies accessible to the network. Hence, the percentage of the block processing volume increases according to the number of accessible cryptos.
This involvement is referred to in the industry as the "staking reward." This allows investors to earn from their current coins without the need to mine them.
However, the staking reward is not paid in euros or dollars, but in the relevant cryptocurrency.
The net outcome in crypto staking is variable. If the value of a coin drops while you have locked coins, you may be worse off than if you had sold them and earned a profit. While the cryptos are staked, they are often not tradeable, so you cannot sell them when the price reaches a new high.
Therefore, the payout must be substantial and enticing enough to entice all kinds of investors to engage in crypto staking. In contrast to the preceding, however, it should not be so high that too many coins are made, since this would lead to inflation.
To prevent a dramatic decline in the price of locked crypto, it is preferable to ascertain the project's sincerity, even though the provided interest rate may sometimes seem excessive.
Although staking crypto is one of the safest and simplest methods to generate money, it is not always the best solution if you are seeking significant returns on your crypto asset investments.
The most lucrative alternative remains the bitcoin exchange, where you may capitalise on price fluctuations. In any event, staking crypto is a wonderful way to gain money without taking excessive risks.
What is the best cryptocurrency to stake?
Although a small number of cryptos can currently be used for staking, there is still a long way to go before this procedure can be implemented with all coins.
A significant number of cryptocurrencies that employ proof-of-work blockchains, a consensus mechanism that has shown to be quite reliable in allowing decentralised consensus, cannot be staked.
Bitcoin, the principal and most well-known cryptocurrency, and Ethereum, its first-generation rival, stand out among cryptocurrencies that may not be used for staking.
The 10 most significant cryptos that can be staked are:
- MATIC
- SOL
- ADA
- ATOM
- XTZ
- 1INCH
- DOT
- EOS
- SHIB
- VET
Benefits of crypto staking
One of the primary benefits of crypto staking is that it eliminates the need to purchase expensive hardware and excessive electrical energy consumption that mining necessitates.
This makes staking cryptocurrency easier, more environmentally friendly, and more energy efficient than mining. In addition, the profits generated by this system are credited in cryptocurrencies.
On the other side, staking contributes regularly and substantially to making the blockchain robust, stable, and secure.
Another key benefit is that crypto staking gives a guaranteed return and a more or less consistent and even predictable source of revenue in contrast to the proof-of-work method, where coins are awarded randomly with a low chance.
Another plus to staking in cryptocurrency is that, unlike ASICs and other mining gear, the value of your staked cryptocurrencies does not decline, but can only be impacted by differences in market pricing.
Types of crypto staking
There are currently two forms of staking:
- Proof of Stake (PoS)
- Delegated Proof of Stake (DPoS)
Proof of Stake (PoS)
Proof of Stake is the earliest form of crypto staking. In this concept, users must make a portion of their coins accessible to the network and beyond their control as a security measure.
The chance of discovering a block, and hence the payout to the one staking, is computed using the number of accessible coins and other variables, such as the random selection of blocks or the coin's age.
Delegated Proof of Stake (DPoS)
Delegated Proof of Stake (DPoS) enables users to assign their currency balances as votes, granting them voting rights according to the number of coins they own.
The votes are then used to elect delegates who would govern the blockchain on their constituents' behalf, guaranteeing security and consensus. Typically, these chosen delegates deliver a portion of the participation incentives to their people in proportion to their individual efforts.