Staking is a term you’ll hear a lot if you’re a cryptocurrency investor. Staking, like many other aspects of cryptocurrency, can be either complex or simple, depending on how many levels of the understanding you seek. It is the method by which various cryptocurrencies validate their transactions. For many traders and investors, the main takeaway is that staking is a method of collecting rewards for holding specific cryptocurrencies. Even if you’re only interested in earning some money from staking, it’s always beneficial to understand how and why things work the way they do.
What exactly is staking, and how does it function?
While many people profit from the purchase or sale of cryptocurrencies, another group of investors profits from staking rewards. The returns from staking are comparable to dividends or interest on a savings account but at a much higher risk.
Let me explain further. If the cryptocurrency you own allows it, you can stake a portion of your holdings and earn a percentage-rate reward over time. This is commonly accomplished through a “staking pool,” which, as previously stated, is analogous to an interest-bearing savings account.
Because the blockchain uses your cryptocurrency, it generates incentives while it is staked. To ensure that all transactions are validated, staking-enabled cryptocurrencies use the “proof-of-stake” methodology.
What cryptocurrencies support staking?
Staking is available with cryptocurrencies that use the “proof-of-stake” model to process payments. It is a more energy-efficient alternative to the original “proof-of-work” model, which relies on mining devices to solve mathematical problems with computer power. Bitcoin, for example, does not support staking because it employs the “proof-of-work” model.
Some of the cryptocurrencies that support staking include Ethereum (via the ETH2 upgrade), Cardano, Polkadot, and Solana.
How do I begin staking?
Staking rewards are available on many cryptocurrency exchanges, at least for a few coins. As a result, using an exchange is the simplest way to get started with cryptocurrency staking. If you purchased your coins on an exchange, simply notify the exchange that you want to participate in its staking program. The rewards are then sent out right away.
What are the threats posed by hacking?
While it may appear that cryptocurrency staking will earn you more money, you should be aware that there are significant risks involved.
The most serious risk is the volatility of cryptocurrency. For example, while a 30% yield may appear appealing, if the cryptocurrency’s price drops by 50% or more, you will end up losing money.
Second, be wary of cryptocurrency platforms that promise huge payouts. Do your homework and thoroughly vet any platform before getting involved with it.
Furthermore, some staking platforms may require you to keep your cryptocurrency for a longer period of time. At that time, you will be unable to use that cryptocurrency. Consider that as well. Lastly, hacking is also one of the potential and considerable risks that you should be aware of.
Staking is a good way to earn money with your cryptocurrency. However, before you jump on the staking bandwagon, consider the cons as well as the pros.