What is Crypto Staking, What Coins to Stake, and How It Can Grow Passive Income in 2022

5 min read

The blockchain makes your crypto work and generates passive income while it is being staked.

Crypto staking: How to pick the best staking coins for passive income

Analysis

What is crypto staking?

Crypto staking is the act of locking one’s cryptocurrency assets to earn rewards or interest. Technically speaking, “staking” refers to how certain blockchain networks verify transactions.

Staking cryptocurrency can be a way to grow one’s crypto assets without having to purchase more. To earn maximum passive income, you can stake crypto. Staking offers investors a higher rate of interest than regular banking accounts.

Let us help you get up to speed if you are interested in crypto-staking but don’t know what it means. It is important to first understand blockchain technology. Blockchain technology is used to create cryptocurrencies. Before the blockchain can store the data, transactions involving this cryptocurrency must be verified. This is known as staking.

Let’s take it one step further.

Blockchain networks have no middlemen because they are decentralized. This is in sharp contrast to traditional financial systems, which use banks to store the public’s money.

Decentralization requires a public record that is accessible across the network. This will ensure transparency and validity for all transactions. Transactions are compiled into “blocks” which are submitted for inclusion in this immutable record.

This is a great security feature for blockchains. It’s difficult to hack or trick because everything is available and verifiable via a distributed public record (the record).

Users who have these blocks will receive a transaction fee in cryptocurrency once they are accepted.

What does all this have to do with staking? You might be asking. Staking, in simple terms, is a way to protect yourself from any errors or fraud that might occur during the process.

Each time a user proposes or votes to accept a block, some of their cryptocurrency is put on the line. This incentive encourages users to follow the rules. In principle, the greater the stakes, the better the chance of earning transaction fees rewards.

If a user’s block is found to contain fraudulent or incorrect data, they may lose the stake they have put up. This is known as “slashing.”

What is the process of crypto staking?

There are many options for starting to stake crypto. You can validate transactions with your computer. You can also “assign” your crypto to someone trusted and ask them for validation.

Not all cryptocurrencies can be staked. This will be discussed in more detail later.

What is proof of stake?

Blockchains can validate transactions using proof-of-stake, which is a consensus mechanism. Proof-of-stake (PoS) is a consensus mechanism that determines whether a block can be validated. It works by determining the stake (or number of coins) and the likelihood of validating it.

PoS was developed as an alternative to the proof-of-work (PoW) consensus mechanism. PoS is a popular consensus mechanism and continues to gain popularity for its efficiency and potential to earn crypto staking rewards.

PoS is not as energy-intensive than PoW and does not require a lot more computational power to verify transactions. To validate blocks, coin owners “take” their coins.

What are the staking rewards?

Blockchain participants are offered incentives called stake rewards. For the validation of transactions, every blockchain has a set amount of crypto rewards. Participants who stake crypto get staking rewards when transactions are validated.

Staking is essentially a way for participants to earn more cryptocurrency. Participants can earn between 20% and 30% annually, depending on the network. Many people use crypto to make passive income and invest their money.

There are many ways to stake crypto

You must choose crypto that uses the proof of stake model to stake crypto. There are many ways to stake crypto:

By means of an exchange

You can choose to use an exchange to stake your tokens on your behalf. An exchange is an online service that specializes in crypto matters. Most exchanges ask for a commission in exchange for staking services. Some popular exchanges that offer staking are Binance.US, Coinbase and eToro.

By joining a staking pool

Some investors don’t use exchanges simply because not all of these platforms support a wide array of tokens. So, another alternative is joining what’s called a “staking pool,” typically operated by another user.

You’ll have to connect your tokens via your crypto wallet with the validator’s pool. To ensure the legitimacy of these validators, ensure you check out the official websites of proof-of-stake blockchains to understand how they should operate.

By being a validator

Validators are coin owners with staked coins. They are selected at random to validate a block. It’s the equivalent of ‘mining’ when using a competition-based mechanism such as proof-of-work.

Naturally, one of the most effective ways to stake crypto is by becoming a validator yourself. Blocks are validated by more than one validator, and when a specific number of the validators verify that the block is accurate, it is finalized and closed.

However, it’s a bit more complicated than using an exchange or joining a pool, as it requires you to build your own staking infrastructure. You need to have the proper equipment with adequate computing power and software and download the blockchain’s entire transaction history.

Becoming a validator typically involves a high entry cost as well. On the Ethereum network, one needs to have at least 32 Ether (ETH), which roughly converts to $140,000, give or take. Read more about staking and becoming a validator on the Ethereum network here.

Is staking crypto profitable?

So, the burning question really is: How does staking crypto make money?

Let’s put it this way. If you’re already familiar with the practice of mining and trading crypto, then that’s a great start. Staking can be just as profitable, minus the risk that comes with mining and trading.

So, yes, staking crypto is profitable. Basically, you have to buy and hold some coins and add them to the mining pool. The profits you make, which typically come in the form of transaction fees, will depend on how much you stake and how long you do it.

Things to consider when increasing your staking profit

Generally, you make more profit with staking as you continue to stake more. However, there are other things to consider when it comes to increasing your profits:

  • Coin value: Steer away from staking a coin with very high inflation rates. You may earn big rewards initially, but since the value of the coin is volatile, you may be left with little to no profit.
  • Fixed supply: Ensure that the token or coin has a fixed supply. Limited circulation of coins within the market ensures a healthy demand and constant price boost.
  • Actual applications: Cryptocurrency demand largely depends on a coin’s actual applications. If it is widely used for various applications in the real world, such as for digital payments, it will continue to have a healthy demand and price.

Which crypto is best to stake?

As mentioned earlier, not all crypto is viable for staking. Bitcoin (BTC), for example, does not support staking because it uses a different method of validating transactions: proof-of-work. Generally, if a cryptocurrency is linked to a blockchain that uses proof-of-stake as its incentive mechanism, it might be eligible for staking.

Ethereum

Ethereum offers substantial staking returns because it remains one of the most popular altcoins in the market today. The average rate of return for staking Ethereum is at 5-17% annually.

Cardano

Like Ethereum, Cardano is also a smart-contract platform. Cardano (ADA) is the digital currency that powers the platform’s proof-of-stake network. Binance supports the staking of ADA and offers yields of up to 24%.

EOS

EOS is also used to support decentralized programs, much like Ethereum. EOS (EOS) can be staked to earn rewards averaging at 3.2%.

Cosmos

Dubbed the ‘internet of blockchains,’ Cosmos allows different blockchains to transact with each other via interoperability. Various platforms support the staking of Cosmos (ATOM) including Coinbase, Kraken and Binance. ATOM staking yields an average of 7% per year.

Tezos

Tezos is an open-source network with Tezos (XTZ) as its native currency. XTZ can be staked on various platforms like Kraken, Binance and Coinbase. The average yield for staking XTZ is currently at 6%.

Polkadot

Polkadot, like Cosmos, encourages interoperability between various blockchains. Despite being relatively new, staking Polkadot (DOT) is supported by several platforms including Kraken, Fearless and Binance. The current average yield for staking Polkadot is at 12% yearly.

Can you lose money staking crypto?

The risk of investing is the most important consideration. Is crypto-staking safe?

It is possible, but there are risks.

You cannot lose money by simply staking crypto. You need to be aware of things like inflation and illiquidity. There are high chances that the crypto you have put up for stake could lose value due to their volatility. Technically speaking, this means that even if your crypto earns yields from staking, it could lose its value.

If you are a day trader, the coins cannot be used for several weeks or months, and you will miss out on the chance to place lucrative bets. It is important to choose wisely which coins to stake.

To ensure you make the right decision before you start staking, review the tips in the section “Is crypto profitable?”

Via this site

Have A Story? Get Featured On Cosmosups Plus 100+ More Exclusive Crypto News Sites