What is Crypto staking? How to earn from Crypto Staking

Staking, like many other aspects of cryptocurrency, can be complicated or simple, depending on how many levels of the understanding you want to achieve. The key takeaway for many traders and investors is that staking is a method of earning rewards for holding certain cryptocurrencies. Even if you're just looking to earn some staking rewards, it's beneficial to understand how and why it works the way it does.

How does staking work?

If you own a cryptocurrency that supports staking — currently, Tezos, Cosmos, and now Ethereum (via the new ETH2 upgrade) — you can "stake" some of your holdings and earn a percentage-rate reward over time. This is usually done through a "staking pool," which is similar to an interest-bearing savings account.

The blockchain puts your crypto to work, which is why it earns rewards while staked. Cryptocurrencies that allow staking use a "consensus mechanism" known as Proof of Stake to ensure that all transactions are verified and secure without the involvement of a bank or payment processor. If you choose to stake your cryptocurrency, it becomes a part of that process.

Why do only some cryptocurrencies have staking?

This is where things get a little more technical. Staking is not permitted in Bitcoin, for example. To understand why some background is required.

• Cryptocurrencies are typically decentralized, which means there is no centralized authority in charge. So, how do all of the computers in a decentralized network arrive at the correct answer without being fed it by a centralized authority such as a bank or a credit card company? They employ what is known as a "consensus mechanism."

• Proof of Work is a consensus mechanism used by many cryptocurrencies, including Bitcoin and Ethereum 1.0. The network uses Proof of Work to direct massive amounts of processing power toward problems such as validating transactions between strangers on opposite sides of the globe and ensuring that no one spends the same money twice. Part of the process involves "miners" from all over the world competing to solve a cryptographic puzzle first. The winner receives some cryptocurrency in exchange for the right to add the most recent "block" of verified transactions to the blockchain.

Proof of Work is a scalable solution for a relatively simple blockchain like Bitcoin's (which functions similarly to a bank's ledger, tracking incoming and outgoing transactions). However, for something more complex, such as Ethereum, which has a huge variety of applications, including the entire world of DeFi running on top of the blockchain, Proof of Work can cause bottlenecks when there is too much activity. As a result, transaction times may be longer and fees may be higher.

What is Proof of Stake?

Proof of Stake is a newer consensus mechanism that aims to increase speed and efficiency while lowering fees. Proof of Stake reduces costs significantly by not requiring all miners to churn through math problems, which is an energy-intensive process. Transactions are instead validated by people who have literally invested in the blockchain through staking.

• Staking is similar to mining in that it is the process by which a network participant is chosen to add the most recent batch of transactions to the blockchain and earn some cryptocurrency in exchange.

• The exact implementations vary by project, but in general, users put their tokens on the line in exchange for the chance to add a new block to the blockchain in exchange for a reward. Their staked tokens ensure the legitimacy of any new transaction they add to the blockchain.

• Validators (as they're commonly known) are chosen by the network based on the size of their stake and the length of time they've held it. As a result, the participants who have invested the most are rewarded. If transactions in a new block are found to be invalid, users may have a portion of their stake burned by the network in a slashing event.

What are the advantages of staking?

Many long-term cryptocurrency holders see staking as a way to make their assets work for them by generating rewards rather than collecting dust in their cryptocurrency wallets.

Staking also contributes to the security and efficiency of the blockchain projects you support. By staking some of your funds, you strengthen the blockchain's resistance to attacks and its ability to process transactions. (Some projects also give "governance tokens" to staking participants, which give holders a say in future protocol changes and upgrades.)

What are some staking risks?

Staking frequently necessitates a lockup or "vesting" period during which your cryptocurrency cannot be transferred for a set period of time. This can be a disadvantage because you won't be able to trade staked tokens during this time, even if prices change. Before staking, it is critical to research the specific staking requirements and rules for each project you wish to participate in.

How do I start staking?

Anyone who wishes to participate in staking may do so. However, becoming a full validator may necessitate a significant minimum investment (for example, ETH2 requires a minimum of 32 ETH), technical knowledge, and a dedicated computer capable of performing validations 24 hours a day, seven days a week. Participating on this level entails security concerns and a serious obligation, as downtime can result in a validator's stake being reduced.

However, there is a simpler way to participate for the vast majority of participants. You can contribute an amount you can afford to a staking pool using an exchange like Coinbase, Binance, Gate.io, etc. This lowers the entry barrier and enables investors to begin earning rewards without having to operate their own validator hardware.