What is Crypto Staking?

Staking is a way in which you can earn passive income on your crypto investment if you are a long-term holder. Firstly you need to know that not all cryptos allow for staking. Bitcoin does not, but Ethereum, Tezos, Cosmos, Solana, and Cardano do because the blockchain puts it to work.

Why do only some cryptos allow staking? Cryptocurrencies are typically decentralized which means there is no one person or organization running the show. So how do all the computers in a decentralized network arrive at the correct answer without having it fed to them by a central authority like a bank or a credit card company? They use a consensus mechanism. Bitcoin uses proof of work while the staking cryptos use proof of stake. Staking serves a similar function to mining, in that it is the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange.

The exact implementations vary from project to project, but in essence, users put their tokens on the line for a chance to add a new block onto the blockchain in exchange for a reward. Their stakes tokens act as a guarantee of the legitimacy of any new transaction they add to the blockchain.

The network chooses validators based on the size of their stake and the length of time they have held it. This means the most invested participants are rewarded. If the transactions in a new block are discovered to be invalid, users can have a certain amount of their stake burned by the network in what is known as a slashing event.

What are the advantages of staking?

This is one way to enhance the yield on your long-term holdings instead of them gathering dust in your wallet. You are literally putting your assets to work. At the same time, by staking you are contributing to the security and efficiency of the blockchain projects you support. By staking some of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions.

What are some staking risks?

Staking often requires a lock-up or vesting period where your assets cannot be transferred for a period of time. This can be a drawback as you will not be able to trade these stakes tokens even if the price shifts. You also need to research the specific staking requirements and rules of each project you are getting involved in.

How do I start staking?

Staking is generally open to everyone who wants to participate. The easiest way is through an exchange. You can contribute any amount you wish without needing to purchase or operate validator hardware.

According to an article in Forbes, the five best staking platforms are Binance, CoinBase, Gemini, Kraken, and KuCoin.

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