What is Staking Crypto and How Does it Work in 2022?
Want to know what staking crypto is? Like many other things in the crypto ecosystem, staking isn’t a familiar term to the majority of the world.
Before crypto enthusiasts and companies overwhelm you with this term, let’s quickly understand what staking crypto is.
Image via Wizardia
In layman’s terms, staking is similar to a savings account in which you lock up your crypto holdings to earn rewards.
Does this mean that the rewards you earn function like bank interest?
Not at all. There is a lot going on behind the scene.
The reason you earn rewards on staking crypto is that your blockchain platform puts the crypto you lock into work.
Cryptocurrencies that allow staking work on a Proof of Stake “consensus mechanism,” which is a process of authenticating the blockchain transactions. The crypto you stake in becomes part of this process.
The key to understanding what staking crypto is is to know more about Proof of Stake.
Before you understand Proof of Stake, you need to get familiar with a legacy blockchain consensus mechanism called Proof of Work.
With Proof of Work, a blockchain network uses a considerable amount of processing power to validate transactions between crypto owners and make sure that nobody can spend the same crypto coins twice.
This process involves ‘miners’ from across the world that compete on an infrastructure basis to solve cryptographic puzzles. The winner gets the right to add the verified block to the chain and receives crypto rewards in return.
The proof of Work concept is excellent for simple blockchains like Bitcoin. But for complex blockchains that facilitate a huge variety of applications, Proof of Work can be an expensive trait.
This is where the latest consensus mechanism, Proof of Stake, comes in.
With Proof of Stake, the transactions are verified by the people who have invested in the blockchain via staking.
What staking is to Proof of Stake is mining to Proof of Work. Where in mining, the right to add a block is awarded to the one who solves the puzzle first, in staking, the right is given to those who have staked more crypto for a longer period of time.
The staked crypto acts as a guarantee of the legitimacy of the blocks the users add to the chain.
Staking brings a plethora of benefits for crypto owners. Following are the pros of staking crypto:
● Staking is the most straightforward way to earn rewards on cryptocurrency
● Unlike mining, staking doesn’t require expensive infrastructure
● When you stake, you basically contribute to keeping your cryptocurrency network safe and secure
● Staking is greener than mining
The earnings from staking depend on the type of cryptocurrency you’re dealing with. Generally, less-popular and new cryptocurrencies offer a high return on staking, whereas popular and reliable cryptocurrencies offer fewer returns.
Following are the general annual average yield (AAY) for some renowned cryptocurrencies:
● Ethereum - 4.33%
● Solana - 5.17%
● Cardano - 4.99%
● Avalanche - 8.95%
● Polkadot - 14%
● BNB Chain - 7.05%
The reward percentages keep changing. You can check for the latest ones here - Staking Rewards
There are a few risks associated with staking crypto:
● As cryptocurrency prices are volatile and can go down instantly, your staked coins will also suffer losses; they are prone to price fluctuations.
● Generally, crypto platforms require investors to stake their assets for a specific period. Unfortunately, this means that you lose the liquidity of your crypto assets.
● As staked crypto are prone to price fluctuations, you cannot withdraw and sell them at the time when prices start to fall.
Staking crypto is a green practice to validate transactions. Long-term investors should definitely consider staking their crypto to earn additional rewards and benefits.