If you are a cryptocurrency investor, staking is a term that you will hear often. Staking, like many other things in cryptocurrencies, might be a complex or simple concept depending on how many levels of understanding you want to uncover. It’s the process by which several cryptocurrencies validate their transactions. The major lesson for many traders and investors is that staking is a method of collecting rewards for holding particular cryptocurrencies. However, even if you’re just seeking to earn some rewards from staking, it’s always useful to know the concept better to understand how and why things work the way they do.
What is staking and how does it work?
While many people earn from buying or selling cryptocurrencies, another group of investors makes a profit by staking rewards. The returns from staking returns are similar to a dividend or interest on a savings account, but with a far higher risk.
Let’s explain it further. You can stake a portion of your cryptocurrency holdings and earn a percentage-rate reward over time if the cryptocurrency you have enables it. This is commonly done through a “staking pool”, which, as we mentioned earlier, is similar to the interest-bearing savings account.
Because the blockchain puts your cryptocurrency to work, it generates incentives while it is being staked. Staking-enabled cryptocurrencies employ the “proof-of-stake” methodology to ensure that all transactions are validated and safeguarded without the need for a bank or payment processor.
Which cryptocurrencies allow staking?
Staking is available with cryptocurrencies that process payments using the “proof-of-stake” model. It’s a more energy-efficient alternative to the original “proof-of-work” model, which needs mining devices to solve mathematical problems using computer power. Bitcoin, for instance, doesn’t allow staking, as it uses the “proof-of-work” model.
Ethereum (through the ETH2 upgrade), Cardano, Polkadot, and Solana are some of the cryptocurrencies that allow staking.
How to start staking?
Many cryptocurrency exchanges offer staking rewards, at least on a few coins. So, using an exchange is the most straightforward method to get started with cryptocurrency staking. If you bought your coins on an exchange, notifying the exchange that you want to participate in its staking programme is simple. The rewards are then sent immediately into your account according to the schedule provided by the exchange.
What are the risks associated with hacking?
While it may appear that taking part in cryptocurrency staking will earn you more money, you should be aware that there are considerable hazards involved.
The most significant danger is the volatility of cryptocurrency. For example, while a 30 per cent yield may appear appealing, if the cryptocurrency’s price drops 50 per cent or more, you will end up losing money on the contrary.
Second, be skeptical of cryptocurrency platforms that advertise massive payouts. Before being involved with any platform, do your homework and thoroughly vet it.
Also, some staking platforms may want you to store your cryptocurrency for a longer time. You won’t be able to use that cryptocurrency at that time. Think about that too.
Finally, hacking could be another potential risk that could affect either a platform or a cryptocurrency.
Staking can be a great way to earn money with your cryptocurrency. However, alongside the pros, consider the cons as well before you jump into the staking bandwagon.