Buying and selling tokens isn’t the only way to earn profit in the crypto-sphere. Another option you can consider is staking. This process allows you to earn a passive income by committing to a holding supporting a specific blockchain network.
Imagine it as depositing money in a bank. While your money is in your account, it isn’t idly sitting in a safe. The bank uses it to process other transactions and even lends it out. To reward you for your participation, you earn a small interest that will be added to your balance.
In theory, there isn’t much difference between the bank deposit model and staking. But the analogy can only go so far since staking cryptocurrency requires more active participation from you along with a higher possibility of reward.
Know more about crypto staking, what it is, how it works and how you can do it in South Africa here at Crypto in Afrika:
What is staking in cryptocurrency?
Crypto staking is earning a passive income by using your crypto assets or existing holdings to vouch for the accuracy of transaction data in an underlying blockchain. The process might seem complicated at first glance. Still, it’s simple enough to even stake directly in your crypto wallet, granted that your wallet is affiliated with a crypto exchange platform that facilitates investing in stakes.
To make a passive income through staking, you need to lock your crypto assets for a set period. You will be rewarded with crypto coins in exchange for staking. These tokens will then be used to operate the blockchain and the crypto market.
What does staking crypto do?
If you’re wondering how does staking crypto work,, the guide below will walk you through the staking process:
The first thing you need to know about staking is it is a passive activity, at least for the most part, since all you have to do is stake your holdings. This means that you need to leave your crypto assets in your wallet. The blockchain network will then use your holdings to forge a new block when you begin participating in crypto staking.
But, of course, not all holdings will be selected. To increase the chance of your holding being chosen, you must ensure you are staking many of your assets. This means the higher the value of your holding, the bigger your chance to validate the new block.
In layman’s terms, the blockchain network uses your holdings to validate the newly encoded transaction data in blocks that will be added to the blockchain. Since you let the network use your assets for the Proof-of-Stake process, you will be rewarded with crypto dividends which are shared profits from the transaction’s revenue.
How to stake cryptocurrency
The process of how to stake crypto depends on which staking option you choose to process your request. Learn all about this as we uncover the three most basic methods for staking:
Staking pool
A staking pool is a collection of assets from different accounts in an exchange platform. This is created to help users increase their chances of receiving the rewards. Most of the time, these rewards are divided among users on the platform based on their contributions.
For example, if your stake amounts to 20% of the pool, you will also get 20% of the reward. To join a pool, you must have the necessary crypto token. Once you have your funds, you can look for the staking pools available in your service provider and participate by transferring your holding via your crypto wallet account.
Before you start contributing your assets to crypto pools, remember that you and the other users won’t receive the rewards in full since the exchange also takes commissions.
Staking on-chain
On-chain staking allows you to use certain blockchains’ proof-of-stake protocol to generate a reward. The term ‘on-chain’ is often used to differentiate traditional staking from the ‘off-chain’ staking process, a form of staking services provided to blockchains that don’t use proof-of-stake.
Most of the time, on-chain staking requires huge asset values since you remove all the third parties in the block verification process and receive the reward in full. While on-chain is considered the most profitable, users with lower amounts of currencies to stake can’t participate in the staking program since it requires huge funds.
Staking in crypto exchange
Many crypto exchange platforms now offer the option for users to stake their compatible proof-of-stake coins to blockchains that run a PoS consensus. Most of the time, the available staking pools and staking options appear in your portfolio in the exchange. Since the exchange platforms support these stakes, they also cut off some of your initial investment as a payment for their service.
How does staking crypto make money?
Staking is an investment option introduced after the proof-of-stake consensus began to appear in different blockchain networks. As it stands, these cryptocurrency ‘stakes’ that you make either in a node or in a pool represent that you vouch for the accuracy of the data stored in a new block.
In exchange for lending your money as collateral in verifying the block, you will yield rewards, which are cryptocurrencies allotted specifically for validating transactions.
Is crypto staking profitable?
Crypto staking is profitable, but up to what degree? Well, this investment is often a good option for investors looking to generate passive income on long-term investments. We recommend finding pools backed with a promising track record and low commission rates to maximise your yields.
Investors with huge crypto holdings are also encouraged to stake in on-chain decentralised finance networks and take on the role of a validator to receive 100% of the reward without any fees from third parties.
How much money can you make from staking crypto?
According to the staking and crypto-growth data provider, Staking Rewards, the potential staking reward for some of the top cryptocurrencies in the market often goes beyond the 11% annual yield mark. It’s important to know that the rewards are subject to fluctuations and might change value over time, so you should evaluate the cryptocurrencies you invest in.
Aside from the fluctuations in the market, some rewards are also charged with fees from the staking pool. The rate for the fee differs from pool to pool, so be mindful when selecting where you will place your stake. Lastly, the amount of your stake can also dictate the reward percentage you will earn.
Is staking crypto worth it?
Staking is only rewarding if it fits your investment style. Before you decide to stake your assets, you must ask yourself the following questions:
- Are you comfortable with long-term investment?
Staking requires commitment since it will ask you to surrender your assets for a certain time to act as collateral in verifying transactions. If you think there are risks of moving your assets on short notice, then be careful in agreeing to staking terms.
- Do you believe in the project?
As we have said before, staking is a long-term investment and having confidence helps when it comes to complying with the terms that come with it. You should be confident in the value of the crypto you are staking so that even the day-to-day swing won’t affect your desire to sell your tokens.
- What kind of an investor are you?
If you want a lowkey and low-maintenance investment, staking is perfect for you since you can earn passive income without requiring daily effort.
Is crypto staking for you?
The answer will all depend on you as a trader. Crypto staking is not a one size fits all type of investment; it requires a certain degree of confidence in those who participate in it and often demands huge holdings before it can generate huge profits. While this type of investment helps create a passive income, those participating in crypto staking shouldn’t expect returns as high as its far riskier alternatives.
To identify if crypto staking will work well for you as an investor, you need to identify your investing style. If you have huge assets but don’t have time to micromanage your investment portfolio, crypto staking will work well for you.
Frequently Asked Questions
Can you lose money staking crypto?
Staking is one of the least risky investments in crypto. However, it still has a few hazards you need to look out for, mainly the value of your token. When the value of the token you staked drops, your rewards will also decrease, but the Annual Percentage Yield (APY) rate is still the same.
Does staking crypto cost money?
Yes, especially if you are staking in a pool or through an exchange. You will have to pay the fee set for these platforms’ services.
Does staking crypto increase the price?
Staked tokens can still be affected by their market volatility, which means their value can increase and decrease.
Is staking the new way to earn money in crypto?
The concept of staking has been introduced along with the proof-of-stake consensus, so it is not a relatively new form of investment.
Is crypto earn the same as staking?
No, crypto earn is an investment product that allows you to lend your crypto to a third party to earn a yield. Meanwhile, crypto staking is helping secure a crypto network by providing your tokens as collateral for transaction verifications.
Is staking crypto taxable?
If you are from the US, your passive income from crypto staking will be treated like any other income and, therefore, taxed.
What is the purpose of staking crypto?
Crypto staking is often used to earn passive income.
