Investing, Understanding Crypto

What is Staking in Crypto?

by Modern Money

Summary

Crypto staking is a way many cryptocurrencies verify their transactions and it allows willing participants to earn rewards for staking their holdings.

What is Crypto Staking?

Staking cryptocurrencies is a process that involves committing your crypto assets to support a blockchain network and confirm transactions.

It’s only available to cryptocurrencies that use the proof-of-stake model to process payments (Ethereum, Tezos, Cosmos, Solana and Cardano). This process is more energy-efficient to the original proof-of-work model that requires mining devices that use computer power to solve mathematical equations.

By staking your crypto, you can earn a percentage-rate reward over time. The reason your crypto earns rewards while staked is because the blockchain puts it to work, using the proof-of-stake model, which is the way they ensure that all transactions are verified and secured without a bank or payment processor.

What is Proof-of-Stake Anyway?

Proof-of-stake is a newer mechanism that emerged with the idea of increasing speed and efficiency while also lowering transactions. Unlike the energy-intensive process of having a crypto miners churn through math problems, transactions are validated by people who are invested in the blockchain via staking.

More specifically, this is how that validation process works according to Coinbase:

  • Staking serves a similar function to mining, in that it’s the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange
  • The exact implementations vary from project to project, but in essence, users put their tokens on the line for a chance to add a new block onto the blockchain in exchange for a reward. Their staked tokens act as a guarantee of the legitimacy of any new transaction they add to the blockchain.
  • The network chooses validators (as they’re usually known) based on the size of their stake and the length of time they’ve held it, so the most invested participants are rewarded. If transactions in a new block are discovered to be invalid, users can have a certain amount of their stake burned by the network, in what is known as a slashing event.

What are the Advantages & Risks of Staking?

Advantages

Instead of having your crypto sitting dormant, you can earn rewards and generate passive income. As an added benefit, your staking does benefit the blockchain as it supports the blockchain projects that you support. By staking, you make the blockchain more resistant to attacks and strengthen its ability to process transactions.

Disadvantages

Often, staking requires a lockup or vesting period which means your crypto can’t be transferred for a certain period of time. This has its drawbacks, as you can’t sell your staked crypto and you risk total loss of your staked crypto as validators on the blockchain can have their crypto slashed which can result in a loss of rewards or your staked crypto.

Remember, staking can be risky so do your research before going all in on staking your crypto!

For more great content similar to this by the Modern Money team, click here!

About Modern Money

This article is brought to you by the Modern Money research team. The insights, information and guidance that you need to take control from those who understand you best.

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