5min read
Published on: Mar 29, 2024
#Trading 101
If you are into crypto, you must have heard of crypto staking. Often misunderstood to be a kind of interest generating scheme, it is one of the most popular ways of gaining profits while doing nothing.
Yes, you merely have to lend the cryptocurrency you hold to a staking pool (more on that later) who promises, "Hey, we won't sell your tokens!" And you end up making a pretty reliable passive income.
As per the latest available data, the staking industry is worth over $350 billion, with $5.85 billion being rewarded globally each year. The benchmark reward rate stood at 5.92%.
However, it's an offer you just can’t refuse, just because how tempting and easy it is. However, easier said than done.
It is important that crypto beginners understand the concept of crypto staking and then make a wise decision, instead of relying on hype.
Crypto staking is a strategy of putting your crypto holdings in a pool in order to earn a passive income without selling them.
It is like giving some of your money to an acquaintance who is an entrepreneur. In return, you take a modest payment from them on a monthly or quarterly basis as discussed between the two.
Since you don't need this money for the time, you give it to an acquaintance. This person is an entrepreneur who requires your capital for different investments. You are guaranteed that you will get your funds back and receive a sort of interest on your lent money.
This is exactly what happens in crypto staking where you lock your crypto assets to a pool and earn a passive income on the lent assets.
The way the entrepreneur friend uses your money to fund different ventures, your crypto assets are used to run the blockchain and maintain its security.
You can stake crypto via the proof-of-stake (PoS) consensus mechanism, used by blockchain networks choosing an environmentally sustainable method, to verify and add new blocks to the network.
To put it simply, you can stake a cryptocurrency and earn rewards on it if it uses the PoS consensus mechanism. Some of the most popular cryptocurrencies using PoS are Ethereum (ETH), Solana (SOL) and Cardano (ADA).
So, if you own any of such cryptocurrencies that use PoS, you can stake those assets in a pool and earn passive income. Your staked assets are used to keep the blockchain running.
Now, you might be wondering if you can stake Bitcoin (BTC) too.
The answer is in the negative – why so?
To understand the difference, you must first understand what consensus mechanisms different blockchain networks use.
Bitcoin uses a proof-of-work (PoW) consensus mechanism which involves participants solving complex cryptographic puzzles for verifying and adding blocks to the blockchain. The process requires an enormous amount of computing power and consumes a high amount of power. For these reasons, it has been consistently criticised for being harmful to the environment.
PoS emerged as an alternative to PoW, allowing blockchain networks to run through staked cryptocurrencies instead of an energy-intensive process. In fact, Ethereum earlier used PoW and made the transition to PoS during the Merge upgrade in 2022.
Let’s come back to staking now.
A PoS blockchain lets you validate blocks in proportion to the units of cryptocurrency you stake. Most validators, those who validate blocks, are not resourceful enough to own large quantities of cryptocurrencies. To tackle the quantity issue, a validator builds a staking pool where crypto holders like you can stake your holdings.
Let’s take an example to understand the concept better.
A budding entrepreneur requires $10k to begin a business venture but only holds $3k. They raise the rest of the amount of $7k through family and friends. Since one person couldn’t begin the venture with limited funds, others joined in and funded it. Now, each of the participants has a stake in the venture.
Thus, a staking pool acts as a single validator with a large amount of cryptocurrency to stake on a PoS blockchain. This way, a lot of users can participate in the block validation process, each of them having a stake.
However, it gives rise to grave concerns around centralisation as those with large amounts of tokens to stake end up becoming bigger stakeholders of a blockchain.
Ethereum founder Vitalik Buterin recently proposed Rainbow Staking as a method of combating centralisation concerns due to staking.
Buterin noted there are not enough solo stakers on Ethereum, citing technical prowess and financial restraints.
With Rainbow Staking, you explicitly split up into two kinds of staking, heavy staking and light staking.
However, the concept is still under development.
Keep in mind that most blockchain projects have a locking period for crypto staking. If you decide to stake a cryptocurrency with a locking period, you won't be able to access those coins for a determined time.
The aim is to ensure that validators aren't going to leave the project on an impulsive decision, the funds are locked and can't be accessed, no matter what, before the end of the locking period.
If you trust a project enough to stake your coins, locking them in for a bit of time shouldn't be an issue.
But beware, if your project has a massive crash during your locking period, you won't be able to sell. Instead, you may end up having a lot of coins with no value in the end.
Crypto staking is considered a safer venture in comparison to trading.
Staking is not the same as investing at market price. When you stake cryptocurrencies, you are essentially locking up your assets to secure the network and earn rewards. The market price of your cryptocurrencies can go up or down during this time, but the units of cryptocurrencies you staked remains the same.
As you can see, it has its pros as well as its cons.
Pros | Cons |
Staking generates passive income on assets you would rather HODL. | Assets get locked for a certain period of time once you stake them, with no liquidity. |
It is generally considered safer than crypto trading. | Since assets are involved, staking is not entirely immune to volatility in the crypto market. |
It supports Proof of Stake (PoS) consensus mechanism-based blockchain networks. | It is not well-regulated. |
BitDelta users effortlessly earn rewards and secure growth with competitive returns with crypto staking on cryptocurrencies such as ETH, SOL etc.
Our platform supports a diverse range of digital assets, providing you with ample staking opportunities.
You can begin staking crypto on BitDelta with these simple steps:
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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