With the rise of crypto and blockchain technology, a new way of earning rewards through investment has been born — staking.
While staking can be a great way to earn rewards and support a network you believe in, there are also some risks involved. In this article, we’ll explore the pros and cons of staking crypto so you can make an informed decision about whether it’s right for you.
But before we do that, let’s begin by finding out what staking really is.
What Is Crypto Staking?
Crypto staking is the process of holding cryptocurrency in a wallet to support the operations of a blockchain network.
What actually happens is that the staker locks up their coins/tokens as a sort of collateral. And in return, they receive rewards for helping to keep the network secure. These deposited coins/tokens are then used to verify the transactions happening on the blockchain through a consensus mechanism known as the Proof of Stake (PoS).
By doing so, stakers can earn rewards in the form of new coins for their contribution to the network.
The process is very similar to that of mining in the Proof of Work (PoW) consensus mechanism. But in PoW, miners contribute their computational power to validate transactions, while in PoS, stakers simply need to hold their coins/tokens in a wallet.
How to Stake Crypto?
Staking crypto is not that hard. Here are the three main ways you can stake your favorite crypto.
The first is to simply hold your coins/tokens in a wallet that supports staking. For example, if you are holding NEO in the NEON wallet, then you are automatically staking.
The second way is to use a staking pool. In this case, you would deposit your coins/tokens into a pool, which would then stake on your behalf. The advantage of this is that it allows you to earn rewards even if you do not have a large number of coins/tokens.
The third way is to use a cryptocurrency exchange that supports staking. Binance, for example, has a “Staking Rewards” program where you can earn rewards for holding certain supported coins/tokens on the exchange.
Types of Crypto Staking
The two main types of staking are proof-of-stake (PoS) and delegated proof-of-stake (DPoS).
In PoS, users validate transactions and add new blocks to the blockchain by staking or holding onto their tokens. The more tokens a user stakes, the greater their chance of being chosen to validate a transaction and earn rewards.
DPoS is similar to PoS, but users vote for delegates, or validators, who then stake the tokens on their behalf. Delegates are often rewarded with a portion of the transaction fees they collect.
Now that you know all about staking let’s discuss its pros and cons.
The Pros of Staking Crypto
Some of the pros of staking crypto are:
Earn Passive Income
One of the biggest advantages of staking crypto is that it allows you to earn passive income. By simply holding onto your coins/tokens and keeping them in a wallet, you can start earning rewards.
Support the Network
When you stake crypto, you’re essentially helping to support the network. By doing so, you’re contributing to the security and stability of the blockchain.
No Technical Knowledge and Hardware Required
Another advantage of staking is that it doesn’t require any technical knowledge or expertise. Unlike mining, which often requires specialized hardware and software, all you need to do is hold your coins/tokens in a wallet to stake crypto.
Potentially Higher Returns
Staking offers the potential for higher returns. However, this depends on the specific cryptocurrency you’re staking. Also, income from staking is much more stable than mining.
Since your coins are locked up as collateral, they are less likely to be stolen or hacked.
The Cons of Staking Crypto
Cons of staking crypto include:
Loss of liquidity
One of the biggest disadvantages of staking crypto is that it can tie up your assets for a long period of time. For example, if you stake your coins for a year, you will not be able to access them during that time.
Another disadvantage of staking crypto is that there is always the risk of a potential adverse price movement. So, if you’re staking a token for a year at a 20% APY, but its price drops by 40%, you will be incurring a loss.
Slashing is another risk associated with staking crypto. This happens when a validator is found to be breaking the rules of the network. When this happens, they are “slashed” or have a portion of their stake taken away.
Minimum Stake Required
Most networks have a minimum amount that you need to stake in order to participate. This can be a barrier for some people who may not have enough coins/tokens to meet the minimum requirements.
Another risk to consider is platform risk. This is the risk that the platform you’re using to stake your crypto could fail or be hacked.
Staking crypto offers a number of advantages, such as the potential to earn passive income and support the network.
However, there are also some risks to consider, such as market risk and platform risk. Before you decide to stake your crypto, be sure to do your research and understand the risks involved.