People often think that the only way to make money with cryptocurrencies is to buy them at a lower price and then sell when the price rises. Of course, it's not the only way. In this guide we’ll talk about staking and how to do it.
What is staking?
Simply put, staking means getting passive income for holding cryptocurrency assets in a wallet. This process uses the PoS (Proof-of-Stake) algorithm, and it works as simple as possible:
- users store their coins in wallets;
- assets support the processes in the system;
- users are getting regular rewards on their wallets.
The participants of the network ensure the efficiency of the blockchain without putting any effort into it. The larger amount that users keep on the wallet, the more blocks are generated and the higher is their income.
Staking is becoming a popular way to make money not only for private investors, but also for institutional ones. For example, a year ago Canadian public company Graph Blockchain announced a $300,000 investment in Cardano. Just like that company was getting additional profits through staking.
What’s the difference between PoS and PoW?
In the Proof-of-Work (PoW) algorithm miners have to make complex mathematical calculations in order to make transactions. If the miner manages to solve the problem, a new block will appear. For all this work miners are getting a reward.
The Proof-of-Stake (PoS) is quite similar to PoW, but miners do not have to solve complex mathematical problems. It was first implemented in 2012 in the PPCoin (renamed PeerCoin) cryptocurrency. The idea of Proof-of-Stake is to solve the Proof-of-Work problem associated with high energy costs. The most popular coins for staking nowadays are Etherium (ETH), Cardano (ADA) and Solana (SOL).
Proof of Stake
- For mining blocks, you need to purchase and keep crypto.
- Does not require anything else.
- Large holders can have a high influence on network development voting.
- You should learn how to buy and transfer crypto.
Proof of Work
- For mining blocks you need to buy special equipment.
- Not eco-friendly because it needs a lot of energy.
- To hack the network, you need to carry out a 51% attack, which is very expensive.
- To make money you need to learn every detail about the process.
You can find out more about the difference between PoS and PoW in this article.
Types of staking
The process of staking might remind you of the traditional bank deposits – you make a transfer to the bank account and do not touch it afterwards for some time, just like that you can get a passive income. The bigger the deposit, the bigger the dividends.
Staking is almost the same, but there are different types of it.
#1 Locked staking.
This type implies some limited period of time – you can choose to participate in staking for a week, month, year, for example. Till this deadline your funds will be frozen, and you won’t have access to them. Usually the income rate on locked contracts is higher than on others. However, if the user wants to finish staking earlier, then the deposit will be returned without any profit.
#2 Flexible staking.
This type of staking doesn’t have any limitation in time. You can keep getting your profit until you sell the order or withdraw your funds. This type is a good idea for those who don't want to block their crypto for too long. Coins are just simply stored on the spot wallet and you get rewards for that.
#3 DeFi staking.
Decentralized finance projects (DeFi) are using smart-contract for staking. It’s very comfortable and in 2022 such projects are becoming more and more popular. Why? With DeFi staking you can get access to various tools for insurance, management, forecasting, etc.
Is staking really profitable?
Why does everyone like staking? We found a few reasons for that. The most important one is safety and the simplicity of the process. With it you have the opportunity to get crypto dividents without any worries. According to Staking Rewards, the average interest rate in it is currently over 9%. The famous crypto exchange Kraken gives a 4% to 6% APY for Cardano (ADA) staking and 4% to 7% for Ethereum 2.0. Moreover, there are various calculators that might help you to count the profitability of staking. Using them is very easy: choose a token and the amount. Afterwards you can calculate the income for the chosen period of time (a year, for example).
Thus, there are some possible risks of staking:
- Due to the volatility of cryptocurrencies, there is always a risk of losing the interest you earn on your crypto holdings.
- For the staking period, you must freeze your coins, which means that you cannot do anything with your assets.
- The unlock period may take longer than expected, preventing you from withdrawing funds or selling assets on time.
Don’t forget about them, if you decide to take part in staking.
How to do staking?
If you are new to the crypto market, but you want to have an additional passive income, then we have good news for you – staking is very easy to do. There are only three steps:
- Choose crypto exchange.
- Look up what PoS coins are there.
- Top up your crypto wallet and start staking.
Yes, it’s easy like that. As we have already discussed, some exchanges offer different types of staking. You can choose the optimal staking for you, which will give you even more freedom in managing your capital.
Conclusion
We can say that now staking is a new trend in the crypto market. You don’t need to buy special equipment, pay for electricity or have certain skills – it’s very simple and everyone can do it. You just need to freeze coins in a separate wallet on the exchange and start receiving dividends after a certain time. But don’t forget to do your own research before taking part in any investment opportunities.
The easiest way to buy or exchange coins is to use SimpleSwap services.
SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.
