Crypto is no longer simply about buying and selling digital assets. They are now a good source of passive income for investors, where they are rewarded with methods like crypto staking.
Let’s take a look at what crypto staking is and how it operates.
What is crypto staking?
Crypto staking is a technique of trading where you literally put all your crypto tokens at stake by sealing them away for a long period. The platform on which you lock the cryptos would give you staking rewards that are a lot like returns on a deposit. However, do note that in this case both you and the platform earn profit. The blockchain system on which the platform operates would then use the cryptos at stake for transaction validation to maintain integrity and safety.
Staking has become very popular off late because it allows everyone involved to gain something. Rather than staying stagnant in digital wallets, cryptocurrencies become active to ensure:
- You’re earning more cryptos
- There are solid rewards coming your way (at least 11% on an average)
- The efficiency of blockchain transactions increase
- Blockchain security becomes tight
- Common goals of the community are achieved
If you’re familiar with financial instruments in general, you will realise that crypto staking is a lot like any other product like a bank deposit or P2P lending which are basically fixed-income products. However, there is certain nitty-gritty that makes crypto staking much more intriguing.
How does it work?
Crypto staking is done in three key ways. For starters, it has the ability to drive users to stay in the game for a long term as the commitment comes with gains and rewards. There are also several advantages of having a personal interest in the process, the primary one being that fairness and integrity are upheld. Second is of course consistent gains over time, everyone loves to keep earning. Here’s how it works:
To start with, more or less all platforms have a minimum staking amount so that there is balance and an appropriate proportion of personal interest. Ethereum for instance asks traders to buy at least 32 Ethers.
The next thing is the blockchain platform. Solid blockchains with good backing and features have the ability to make the most of crypto staking. As a result, it ensures a win-win situation for everyone involved. This goes on to build a sense of community among investors.
In the end, you have to bear in mind that not every cryptocurrency will allow you to start crypto staking. It can be done only with those cryptocurrencies that have a Proof-of-Stake mechanism in place.
The ‘Proof-of-Stake’ consensus method allows distributed ledgers in blockchain to function in tandem with one another. Let’s try to break it down further for the sake of simplicity and better comprehension.
Consensus essentially refers to mutual agreement between two or more parties. A blockchain network has many distributed ledgers that have to reach a consensus on the situation of the platform so that wrongdoings can be prevented and managed. There are many such consensus mechanisms that are available but Proof-of-Stake is important for crypto staking.
Proof-of-Stake makes it necessary for all crypto investors to also be validators on the blockchain. They utilize their personal cryptos to process transactions and create new token blocks. This is important to make sure that the blockchain comes to a consensus.
Crypto staking risks and benefits
- Crypto staking brings great returns
- The crypto tokens that would otherwise keep lying dormant in your wallet become a source of consistent passive income.
- Involving yourself in crypto staking will help to make your blockchain network much more efficient.
- Proof of Stake is much more power-efficient than Proof of Work that Bitcoin uses. Miners do not have to spend too much on power consumption to obtain more coins.
- Market Risk
Market movements that can have a negative impact on asset prices are one of the most prominent concerns for crypto staking.
- Liquidity Risk
Volatility and liquidity are also areas of concern when it comes to staking cryptocurrency. Consider the liquidity of the asset at risk, as these are factors beyond an individual’s control.
- Lockup Duration
While there are several crypto staking risks, the locking period is the one that alarms most investors. Staking a cryptocurrency, makes it go in a locked state, but not always. There are certain crypto assets that typically have a lockup period in the course of which you lose all access to staked assets.
- Rewards Duration
Another major concern that comes only second to the lock-up period, is the duration of the reward. It is one of the most pressing crypto staking risks as not all crypto assets have daily staking reward payouts. Investors would then have to keep waiting to get their earnings.
- Validator Risks
Staking cryptocurrencies further adds to the validation risks as validator node operations as required for cryptocurrency staking demand sound technical knowledge. Validators are responsible for assure that there are minimum disruptions in the staking process and the nodes have 100% uptime so that staking returns are good.
- Loss or Theft of Assets
Theft or loss could affect cryptocurrencies just the way it impacts traditional assets. Losing your assets or someone stealing your digital tokens is a major crypto staking concern that could happen perhaps because you forget your private keys. In certain conditions, too liberal safety norms could lead to the theft of crypto. While the way you stake cryptocurrencies is irrelevant, you must ensure that you’re backing up your wallet adequately. If you store your crypto assets safely and keep the private keys private only, everything will remain safe in hand.
It is true that now there is not a lot of hue and cry around cryptocurrencies. The time has come when investors can fully experience the true potential of cryptocurrencies and the wealth they bring in. The general trading and exchange of crypto aside, it is also possible to look at crypto as an investment using techniques like crypto staking. It has proven to be a great way to boost passive income.