What Is Crypto Staking & How Does It Work ?

What Is Crypto Staking & How Does It Work ?

By CryptoWise | CryptoWise | 15 Jun 2021


 

In this guide, you will learn about what is crypto staking & how to act responsibly to harness its full potential 

Crypto Staking

 

I Feel:

Defi innovation of 2020 has opened multiple avenues for users to generate decent wealth apart from crypto trading. But still, the onus is on the user to educate themselves well and then invest to harness the best out of Crypto lending & staking services of DeFi world.

Defi platforms are growing fast since their advent and have been offering some unique ways of monetizing digital tokens. Crypto staking has been one such life-changing feature of Defi, empowering digital token holders to earn some handsome passive income. The millennial generation and the experienced traders of crypto have been leveraging these Defi platforms to stake their crypto and the trend is surging high with some exponential growth.

The proof-of-stake consensus mechanism has been largely the driver of the Defi platform’s success and currently, As can be seen below, TLV (Total value locked in Defi is more than 80 billion as of date, and continues to grow. )

0*aMNbL8BsYPzmCMu6 source: The block Crypto

Out of the total value locked in Defi, Crytpo lending amounts to>26 billion as of May 2021.

0*xSKFXYgYqxTIeL7f source: The block Crypto

These numbers speak a volume about the opportunity and value locked in this Defi ecosystem. Before we go ahead to define and understand more about what is crypto staking we must be aware Proof-Of-Stake,

Proof of stake is a type of consensus mechanism used by blockchain networks to achieve distributed consensus through staking. Here the validators, now need to be in the possession of the native token of the concerned blockchain (for example ETH in the case of Ethereum), which they are required to stake to validate any transaction and build a consensus among all the nodes in the network

I have covered the PoS in detail here in the article linked below:

Proof-Of-Stake Explained

Please do spend some time to understand the underlying technology and how it works, this will help you to be more informed before you learn more about Crypto staking going ahead in this article.

What Is Crypto Staking?

Now that you have understood what is proof-of-stake, its time to define,

Crypto Staking:

Crypto staking is a financial tool that allows users to lock in their crypto tokens to help the concerned blockchain platforms achieve the required consensus in the network via proof-of-stake.

It is a more efficient and less resource-intensive alternative to crypto mining (which uses Proof-Of-Work). Staking involves validators who lock up their tokens so that they can be randomly selected by the Defi protocol at specific intervals to create a block.

Does Every User Stake Gets Accepted As Validator?

Not everyone who has decided to stake their tokens gets the right to validate the blockchain transactions, as there are certain rules applicable that vary based on blockchain Defi protocols. The decision of who will be able to participate and validate mostly depends upon the total count of crypto tokens at stake.

For Example :

In Ethereum 2.0, users need to stake at least 32 ETH to become eligible for acting as a validator, the rest of any user can act as a delegator of their token at stake and win rewards for the same.

But users can definitely stake their coins and act as a delegator to earn rewards for their locked in coins. Their staked coins in this case is lent to the selective validators and the user gets rewarded on their behalf.

Proof-of-stake blockchain Projects are highly scalable and have high transaction throughput.

In a nutshell:

Staking simply means locking funds in a suitable & secure wallet, enabling users to perform various network functions pertaining to the Defi platform & earn decent staking rewards for the same. User can also add funds to a staking pool,

What Is a Staking Pool?

A staking pool allows multiple stakeholders to combine their computational resources as a way to increase their chances of being rewarded. Simply put, it is a mechanism to team up and has unified staking power to verify and validate new blocks, thus enhancing the chance to earn more block rewards

Staking Requirements, Rewards & Risks?

The return on your staked coins vary based on the type of Defi protocols and are majorly dependent on the following key factors :

  • Count of coins at stake
  • Total locked-in token count in the given Defi network
  • The market condition and rate of inflation
  • The duration of the concerned validator and his longevity in term of active staking

Staking on Ethereum 2.0:

Requirements :

You’ll need 32 ETH to become a full validator or some ETH to join a staking pool.

Rewards:

  • You will be rewarded for actions that help the network reach a consensus.
  • Also, you will get rewards for batching transactions into a new block or checking the work of other validators, as you enhance the security of the network by doing so

Risk:

  • If you act inappropriately or found to be malfunctioning you will risk yourself losing all your staked 32 ETH.
  • You can lose ETH for malicious actions, going offline, and failing to validate.

Staking on Tezos:

To become a staker / baker on Tezos,

Requirements :

The user needs to hold 8,000 XTZ coins and run a full node.

Returns:

Annual percentage yield (APY)on XTZ staking ranges anywhere from five to six percent.

Risk:

If you act inappropriately or found to be malfunctioning you will risk yourself losing all your staked XTZ

Staking on Binance:

Similarly, you can execute crypto staking on Binance smart chain, which supports the token like USDT,  USDC BUSD, DAI, BTC, etc.

  • The only requirement is to hold your PoS coins on the Binance exchange, and all the technical requirements will be taken care of for you
  • The staking rewards are usually distributed at the start of each month.

Coinbase is also another top exchange like finance where you can earn rewards for your crypto tokens. Apart from ETH 2.0 staking it also supports other coins accommodated on Coinbase staking include ALGO and XTZ etc..

In a nutshell:

  • You have multiple platforms like centralized crypto exchanges viz, Coinbase, Binance, which allows you to lock in your coin and earn a passive income for staking.
  • Though returns are low as compared to Defi protocols, as they cover a lot of pain points of setting up your wallet, securing it, and transacting. But if you are comfortable with the Defi ecosystem you can earn a higher return.
  • Exchange mostly offers returns in APY ranging from 5–12 percent which depends upon the coin type staked. You get most returns for staking stable coins like USDT, USDC, BUSD, DAI, etc.
  • Defi platforms like AAVE, UniSwap, Maker, Synthetix, Compound, Yearn Finance, offer higher returns and can shoot up to 25–40 % and even higher. The rewards are highly fluctuating, to check the returns, please visit the below-given link. Here you will get the calculator to make your life easy.

Defi Assets Ranking and Yields | Staking Rewards
List of the top DeFi crypto assets. Keep track of the best yielding decentralized finance tokens. Earn passive income…www.stakingrewards.com

  • Risks associated with Defi protocols are extremely high and users are required to do their own research before staking. Don’t get too caught up in annualized rewards or APYs. There are many other crucial factors to consider such as the reputation and age of the platform.

Summary: Closing Thoughts

Crypto staking, crypto lending, staking in the pool, all these alternate instruments to put your crypto to work while you sleep, definitely provides you the extra luxury to earn more, but understanding the underlying technology, project reputation, associated risk,  network stability is extremely important for you to understand as a crypto investor.

Compound platform set the trend in 2020, and now AAVE is shining ahead, and there are many more in the line, and I feel the future of Defi is here to stay, as now technology and infrastructure is more congenial with the advent of multiple blockchains scaling platforms like Polygon, Solana, Ethereum 2.0, Cardano, Fantom, etc.

The network stability, security and scalability has been the largest concern associated with Defi protocols, but now these concerns are being mitigated fastly, but still as a user you need to be invested not only in terms of fund but also in terms of amount of research you put in, before choosing the right platform for crypto lending or staking .
“Be a responsible investor as there is lot at stake apart from funds ”

On this note, I would like to sign off and would like to extend my heartfelt gratitude to all you awesome readers, you all are my true inspiration motivating me to write and share as always.

Thanks a lot……

 

Disclaimer!

Opinions expressed here at CryptoWise are not investment advice and are only for educational purposes. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency, or digital assets. Please be advised that your transfers and trades are at your own risk, and any losses you may incur are your responsibility

NOTE!

This article was first published on Medium, Here is the link:

https://medium.com/crypto-wisdom/crypto-basics-what-is-crypto-staking-7fd45ef915ef

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