Cryptocurrency staking is becoming an increasingly popular way to earn passive income in the crypto world. It’s a way to secure the blockchain network, validate transactions, and get rewarded for it. Staking also provides liquidity to the market, and it keeps the cryptocurrency in circulation. In this article, we’ll dive into the world of staking and everything you need to know about it.
What Is Staking?
Before we jump into the technical details of staking, let's define what it is. Staking is the process of holding cryptocurrency in a wallet, which allows you to participate in the network’s operation. In doing so, you earn rewards for securing the network.
Staking is similar to mining, but instead of using computational power to solve complex mathematical problems required to validate transactions, stakers use their coins to maintain the network’s security. Staking also eliminates the need for expensive mining rigs, making it accessible to more people.
How Does Staking Work?
To understand how staking works, you first need to understand how blockchain technology works. A blockchain is a distributed ledger that records transactions on multiple computers, ensuring that no central authority controls it. In a Proof-of-Stake (PoS) network, the validators of these transactions are staking their cryptocurrencies to secure the network.
In PoS networks, validators are selected based on the number of coins they have staked. The more they stake, the more likely they are to validate transactions blocks and mint new coins. Validators are also incentivized by earning rewards for their participation in the process.
The process is as such:
- A person stakes a certain amount of cryptocurrency in their wallet.
- The wallet is connected to the blockchain network, and the coins are locked in a smart contract.
- The validator waits to be selected to validate a transaction block.
- When the validator verifies a block, they earn a reward in the cryptocurrency they are staking.
What Cryptocurrencies Can You Stake?
Many cryptocurrencies offer staking, from the well-known ones such as Ethereum and Cardano, to newer projects like Polkadot and Avalanche. The staking reward and requirements vary between cryptocurrencies, with some requiring a minimum number of coins to stake, and others requiring the user to keep their coins locked up for a set period.
Many cryptocurrencies offer staking, from the well-known ones such as Ethereum and Cardano, to newer projects like Polkadot and Avalanche. The staking reward and requirements vary between cryptocurrencies, with some requiring a minimum number of coins to stake, and others requiring the user to keep their coins locked up for a set period.
Ethereum is the second most valuable cryptocurrency by market capitalization and offers staking rewards for holders. The move to a proof-of-stake consensus was a long-awaited upgrade for Ethereum, and staking has been live since late 2020. Ethereum staking requirements are a minimum of 32 ETH to run a validator node.
Another popular project with staking functionality is Cardano. The Cardano network operates on a proof-of-stake consensus, and staking rewards are distributed in the ADA cryptocurrency. The Cardano staking requirement is also lower than Ethereum, with a minimum of one ADA needed to participate.
Polkadot is a relatively new project and has gained significant attention in recent months. It allows interoperability between blockchains and offers staking rewards for holders. The Polkadot staking requirement is a minimum of one DOT.
The Risks of Staking Crypto
No investment comes without risks, and staking is no exception. The most significant risk of staking crypto is the potential for losing all or some of your investment. The value of cryptocurrencies fluctuates tremendously, and staking can lock up your funds for a set period, making it difficult to sell when the value goes down.
If the cryptocurrency you are staking is also used as collateral for a loan or other financial product, you may also risk losing your funds. Many lending platforms require a minimum amount of collateral to be staked and, in return, offer loans in fiat currencies or stablecoins. If the loan terms are not met, the collateral may be liquidated to cover the costs.
Another risk of staking in PoS networks is the potential for centralization. Validators with more coins staked may have more of a say in the network's governance, potentially leading to centralization of decision-making.
Lastly, staking also requires technical knowledge and expertise, and there is always the potential for user error when setting up a validator node. The majority of PoS networks have penalties for malicious behavior, such as double-signing, which could lead to a loss of staked funds.
How Can You Start Staking on Coinbase
Coinbase is one of the easiest ways to start staking cryptocurrencies. The platform offers staking rewards for several currencies, including Cosmos, Polkadot, and Ethereum. Here's how to get started:
- Sign up for Coinbase if you haven't already.
- Deposit cryptocurrency into your account.
- Go to the staking page under “Earn†on the Coinbase app.
- Choose the cryptocurrency you want to stake.
- Follow the prompts to stake your cryptocurrency.
Coinbase handles everything for you, making it a convenient way to earn staking rewards without technical knowledge.
Conclusion
Staking cryptocurrency has its risks, but it’s also an exciting way to earn passive income and participate in the governance of PoS networks. The market for staking is also growing, with more cryptocurrencies adopting PoS consensus and offering staking rewards for holders. If you’re considering staking cryptocurrency, do your research. Understand the risks involved and the rewards offered by your chosen cryptocurrency, and choose a reputable staking service or platform to ensure your investment is secure.
Disclaimer: The information provided in this article is solely the author/advertisers’ opinion and not an investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions by TheCyberSidewalk and the team. Anyone wishing to invest should seek his or her own independent financial or professional advice. Do conduct your own research along with financial advisors before making any investment decisions. TheCyberSidewalk and the team is not accountable for the investment views provided in the article.
