What Is Staking? | Notum
Dec 10, 20215 min read
People are earning money on crypto by trading, but there are way more options to get benefits from your crypto holdings.
One of the methods is called 'staking', and it means using a certain cryptocurrency to help to validate transactions on a blockchain platform. Those who take part in staking can earn so-called 'yields,' which is the return of the money you've invested.
If you’re thinking about whether to use your holdings for cryptocurrency staking, it can be helpful to educate yourself and learn which crypto could be the best for staking and how the process is initiated.
Why People Stake Crypto?
Staking is used to verify some cryptocurrency transactions, and above all, it empowers participants to earn interest on their holdings. It’s a more or less advanced tool helping to get an additional profit from crypto.
Staking cryptocurrencies is a process when you commit your crypto holdings to support a blockchain platform and confirm transactions there.
Let’s have a brisk look at blockchain technology before we start going deeper into staking. Blockchains are “decentralized,” which means there’s nobody in the middle while having transactions and other operations. As an example, centralized authorities such as a bank acts as a middleman that validates your transactions. Instead of a traditional model with banks, users verify “blocks” of recent transactions and add them to the blockchain. Users with accepted blocks get a transaction fee paid in cryptocurrency.
Staking also helps to prevent fraud and errors in the process. Users propose a new block or vote to accept a block and some of their own cryptocurrency on the line, which incentivizes following the rules.
It works easily — the more a user stake, the greater their chance of receiving transaction fee rewards. But there is a possibility of slashing that happens when a user’s proposed block has inaccurate information, so some of the stakes could be lost.
The process of staking is possible with cryptocurrencies using the proof-of-stake (PoS) model to make transactions. This is an alternative to the proof-of-work (PoW) model, requiring special mining devices that use computing power to solve mathematical puzzles.
Staking can be a beneficial way to use your crypto for getting some passive income, especially because some cryptocurrencies offer high-interest rates for staking.
The whole process massively simplified:
- Find cryptocurrency that uses a proof-of-stake model
- New transactions should be verified before being added to the blockchain
- Participants commit their assets to the protocol
- The protocol chooses validators to confirm transaction’s blocks
- New assets are minted and rewarded to those validators once a new block is added to the blockchain.
Which Crypto Is the Best for Staking?
Once a cryptocurrency of your choice is linked to a “proof-of-stake” blockchain, it means it’s available for staking. Some examples of such beneficial cryptocurrencies at the moment of writing are Ethereum (ETH), Cardano (ADA), Polkadot (DOT), Terra (LUNA), Tezos (XTZ), Polygon (MATIC), and others.
It’s crucial to mention that there are many cryptocurrencies you can’t stake because they use a “proof-of-work” mechanism. A nice example is Bitcoin (BTC), which is one of the most valuable and famous cryptocurrencies out there.
Good to know that some exchanges offer their users the opportunity to loan their cryptocurrencies, which allows participants to earn interest on Bitcoin and other assets without staking.
How to Earn Crypto With Staking?
- Do research
Don’t neglect the basics and find out more about the essentials. It would be best to have careful research to escape scams and dubious projects out there. That would be helpful if you watched some bloggers into crypto and read various articles on the relevant topic. The more you research and learn, the better you can perform with your staking. Choose only high-quality resources, well-known communities, and top influencers not to waste your precious time.
- Get a reliable crypto wallet
That’s one of the most important issues once you’re dealing with crypto. Find the most secure and reliable wallet that would be easy and enjoyable to use. You have different options to choose from — cold wallets (cold staking) or hot wallets (hot staking).
- Pick a coin that is best for staking
Staking is becoming more popular, so the variety of tokens is getting much wider. Starting with Ethereum 2.0 to some stablecoins as USD coin (USDC) or Binance USD (BUSD). Follow the CoinMarketCap to be updated.
- Choose the best exchange platform or pool
Exchanges are really into staking thanks to a number of active users who can monetize their funds within the chosen platforms. Binance, Coinbase, Gemini are among the most popular ones.
DeFi plays the game as well, so you can use decentralized platforms for staking. You can use a staking calculator that will help you to count your future staking rewards. Mind that the amount of reward depends on a blockchain network. There are Plasma Finance, Compound, Aave, dYdX, Synthetix, and Maker.
- Find out about the necessary balance
Validators are participants who have a minimum required balance for staking. How much should it be? The amount depends on definite crypto, for example, the minimum required for an Ethereum node is 32 ETH.
Mining and Staking
Mining and staking differ in blockchain mechanisms used to validate transactions. Mining is used for Proof-of-Work (PoW), and staking is mainly used for Proof-of-Stake (PoS) algorithms.
Miners are solving mathematical problems
|Nodes in the network engaged in validating new blocks|
The block is added to the blockchain by the first miner who solves the mathematical problem
|Nodes validate a new block and lock it up in a smart contract|
There is special mining hardware (ex: ASIC, GPU) that is energy-consuming
|It is considered to be non-consumptive|
Depending on how much computing power a user shares, a higher chance of verifying the block and being rewarded
|Depending on how many native tokens are staked, the higher chance of being selected to validate new blocks|
Benefits of Staking
To earn interest on your cryptocurrency holdings no need for equipment for crypto staking as you might need in crypto mining help to maintain the security and efficiency of the blockchain considered to be more eco-friendly than crypto mining cryptocurrencies use PoS to process lots of transactions at minimal cost crypto holders get the opportunity to get passive income from their holdings.
It’s been a while since crypto occurred and changed the world forever, people get used to usual operations with digital currency and develop new strategies and tools to work with new kinds of money. Staking is a significant example of such transformations, a powerful mechanism to gain more profit and become an advanced crypto holder.
Staking could be a perfect tool for making extra money on crypto, it’s an excellent way to earn interest on your investments, but you have to understand how it works first. To do so, revise the list of things we mentioned above and start your crypto adventure without any fear.