Staking

Staking is perhaps the least known process in the cryptocurrency industry, which allows users to earn rewards for participating in blockchain validation processes. Staking is an energy-efficient alternative to traditional mining, used primarily in blockchains that use the Proof-of-Stake (PoS) mechanism. Below is an explanation of the basics of staking, its pros and cons, and how to start earning passive income from staking.

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What is Staking in Cryptocurrency?

Staking is the act of helping to validate and secure a blockchain network by locking cryptocurrency assets in a staking contract. As a reward, staking participants, or validators, or delegators, receive rewards in the form of additional tokens. This method is commonly used in the Proof-of-Stake (PoS) scheme and its variations such as Delegated Proof-of-Stake (DPoS) and Liquid Proof-of-Stake (LPoS), which replace traditional cryptocurrency mining in Proof-of-Work (PoW) networks.

How Staking Works

Staking is the process of locking up a certain amount of cryptocurrency to validate network activity such as block validation, transaction settlement, and network security aspects. Tokens can be staked directly by users or delegated to a staking pool, depending on the network. Validators are selected based on the amount of tokens staked and other considerations such as network contribution and online time.

Major Benefits of Staking

  • Passive Income: Staking allows token holders to earn passive rewards for validating the network without the expense of specialized hardware.
  • Energy Efficiency: Staking is significantly more energy efficient than PoW mining and is therefore a more sustainable option.
  • Network Security: Staking ensures network security by preventing malicious activity, as validators have a direct incentive to protect the network.
  • Governance Participation: Some blockchain networks provide voting rights to stakers so that they can vote on protocol updates and governance proposals.

Several blockchain networks use staking, including:

  • Ethereum (ETH): Switched from PoW to PoS with Ethereum 2.0, requiring at least 32 ETH for validation.
  • Cardano (ADA): Implements Ouroboros PoS, where staking can be achieved through delegation without the need to lock up funds.
  • Solana (SOL): Implements high-speed staking with low fees.
  • Polkadot (DOT): Simplifies staking and governance voting with its Nominated Proof-of-Stake (NPoS) process.
  • Tezos (XTZ): Implements Liquid Proof-of-Stake (LPoS) with dynamic staking.

Staking Weaknesses

Staking is not completely without its downsides, as it comes with risks such as:

  • Slashing Penalties: Validators that engage in malicious activity or are offline will be subject to slashing, which means they will lose some or all of their staked funds.
  • Lockup Periods: Funds are locked in certain staking protocols for a certain period, reducing liquidity.
  • Market Volatility: Price volatility of the staked asset can impact overall returns, even if staking rewards are earned.
  • Validator Risks: Staking tokens with untrusted validators may result in penalties or reduced rewards.

How to Start Making Money Staking

  1. Choose a staking platform: Decide whether you want to stake directly on the blockchain network, on an exchange platform (e.g. Binance, Kraken), or team up with other staking pools.
  2. Choose an asset to stake: Make sure the cryptocurrency you hold can be staked and read the staking terms.
  3. Stake your tokens: Send your tokens to a wallet, validator node, or exchange.
  4. Track your progress: Track your staking rewards, validator uptime, and network governance contributions.

Is Staking a “Cryptocurrency Deposit”?

No, staking is not exactly a “cryptocurrency deposit,” but they do have some similarities.

The main differences between staking and deposits are:

  1. Staking means locking cryptocurrency into the blockchain to support the network and earn rewards. It is based on Proof-of-Stake (PoS) and its derivatives.
  2. Classic deposits mean a bank deposit of money with a guarantee of return and interest.

Why you shouldn't confuse staking and deposits:

  • Staking does not guarantee a 100% return (for example, due to exchange rate volatility or a scaling mechanism - a penalty for breaking the rule).
  • Interest for staking is based on the network, not on the bank's terms.
  • A deposit is provided with legal protection for the depositor, while staking is not yet (but this is expected in the future).

But sometimes centralized exchanges (CEX), such as Coinbase or Binance, offer staking with a time limit, and advertising calls them "crypto deposits". It is worth understanding that technically these are not bank deposits, but an investment instrument with risk.

Staking: Conclusions

Staking is important for ensuring the security of PoS blockchains, but it also offers users a way to earn passive income. However, staking requires careful selection of assets and validators to avoid risks. As the blockchain sector evolves, staking is becoming increasingly popular as a less resource-intensive replacement for traditional mining.