Crypto Basics: What is Staking?

Many users who hold cryptocurrency over the long-term chose to stake their crypto, as it allows them to an APY, similarly to a savings account. Typically, staking refers to securing proof of stake networks, but it can also refer to locking a protocol's token to participate in governance and earn rewards.

Let's dive into the different forms of staking, the associated risks, and the potential rewards.

What is Staking?

Staking refers to the process of earning rewards from locking your digital assets. Generally, the lowest risk way to stake crypto is by validating Proof of Stake blockchains, such as staking ETH to a validator node or staking Celestia (TIA) for potential airdrops.

Staking can also refer to locking a protocol's governance token, which is generally a higher risk investment. This is due to varying levels of protocol security, as well as higher volatility in the token's price. Some examples of this type of staking are staking Curve tokens to Curve Finance or staking PENDLE for vePENDLE.

Staking provides an opportunity for investors to earn passive income while actively contributing to the stability and functionality of decentralized networks. Different cryptocurrencies and blockchain platforms may have varying staking mechanisms, so you need to understand the specific rules and requirements associated with each.

Proof of Stake Validation

Proof of stake (PoS) serves as a consensus mechanism in the realm of cryptocurrency, facilitating transaction processing and the generation of new blocks on a blockchain. This mechanism, essential for validating entries in a distributed database, plays a role in maintaining the security of the database. In the context of cryptocurrency, the distributed database is known as a blockchain, and proof-of-stake (PoS) ensures the security and integrity of this blockchain.

Staking is exclusive to certain cryptocurrencies because of their adoption of the PoS consensus mechanism. Not all cryptocurrencies incorporate this mechanism, thereby rendering them ineligible for staking. The availability of staking depends on a cryptocurrency's specific design and choice of consensus mechanism, with PoS being a prerequisite for this feature.

How Does Staking Work?

Staking involves investors locking their crypto assets to contribute to a blockchain's consensus model. However, the onset of liquid staking has allowed users to keep funds liquid while earning staking rewards, alleviating some risks associated with staking. As a reward for staking, participants earn additional units of the cryptocurrency they stake.

Different Ways of Staking Cryptocurrency

There are various approaches to staking cryptocurrency.

• Use a cryptocurrency exchange: One common method involves using a cryptocurrency exchange to participate in staking. This process typically involves depositing the desired cryptocurrency into a specific staking account on the exchange, which manages the staking process on behalf of the user.
• Hold liquid staking tokens: Most commonly found on Ethereum and Solana, liquid staking tokens offer a way for users to earn staking rewards for simply holding a token. Some examples are stETH, OETH, bSOL, and jitoSOL.
• Become a validator: For those seeking a more active role, becoming a validator is another approach. Validators play a crucial role in PoS networks by verifying transactions and securing the blockchain. To become a validator, individuals typically need to lock a certain amount of cryptocurrency as collateral and adhere to network rules. Validators are then rewarded for their contribution to the network's security and consensus process.

What Are the Advantages of Staking Crypto?

• Effortless earnings: Earn interest on your cryptocurrency holdings through staking, providing a seamless way to increase returns.
• Equipment-free participation: Unlike crypto mining, users can forgo the need for hardware and maintaining uptime via liquid staking.
• Security enhancement: Staking actively contributes to maintaining the security and efficiency of blockchains, ensuring a secure and robust network.
• Environmental friendliness: Staking is considered more environmentally friendly compared to traditional crypto mining practices, aligning with sustainable and eco-friendly principles.

What Are the Risks of Staking Crypto?

• Market risk: Falling asset prices can lead to significant losses, impacting returns even with a high annual percentage yield (APY). Caution is advised in asset selection, emphasizing more than just a high APY.
• Liquidity risk: Staking illiquid micro-cap altcoins may pose challenges in selling or converting rewards. Optimal risk mitigation involves staking assets with higher liquidity and robust trading volumes.
• Lockup periods: Some stakeable assets have lockup periods, restricting access during price downturns. Opting for assets without lockup periods allows flexibility in withdrawing investments.
• Validator and operational risks: Running a validator node requires technical expertise and constant operational status for maximum returns. Delegating stakes to trusted third-party validators mitigates risks associated with running a personal node.

How to Start Staking Crypto

• Choose a stakable cryptocurrency: Select a cryptocurrency that supports staking. Common choices include Ethereum (ETH), Solana (SOL) and Polkadot (DOT).
• Select a wallet: Choose a secure wallet that supports staking. Some wallets have built-in staking features, while others may require integration with specific staking platforms.
• Acquire stakable assets: Buy the cryptocurrency you intend to stake by purchasing it through a cryptocurrency exchange.
• Transfer assets to your wallet: Transfer the acquired assets to your selected staking wallet. Ensure that your wallet is compatible with the chosen stakeable cryptocurrency.
• Choose a staking method: Decide whether you want to stake independently, join a staking pool or delegate your stake to a validator. Each method has its own set of considerations and potential returns.
• Delegate to a validator (if applicable): If you opt for delegation, choose a trustworthy validator or staking pool to delegate your assets. This consideration is relevant for PoS networks where validators play a role in block validation.
• Initiate the staking process: Follow the instructions provided by your chosen staking platform or wallet to initiate the staking process. This process may involve specifying the amount to stake and confirming the delegation details.
• Monitor staking performance: Keep track of your staking performance through the staking platform or wallet interface. Monitor rewards, transaction history and relevant updates.

Should You Stake Crypto?

Staking crypto offers a relatively low-risk way to earn extra tokens from your holdings. However, risks depend on the token and network that you stake on, so be sure to do your own research before committing to staking. For many long-term investors, staking digital assets is a great way to further their portfolio's growth.

Other Ways to Earn Interest on Crypto

Exploring alternative methods to earn interest on your cryptocurrency holdings opens up diverse opportunities. Of the options currently available, one of the easiest ways to get started is with Nexo.

Nexo.io is a blockchain-based lending platform that enables users to earn interest on their crypto deposits. By staking stablecoins, altcoins, or NEXO tokens, users can access competitive interest rates. Nexo.io also offers a credit line backed by crypto collateral, providing a comprehensive suite of financial services within the crypto sector.

Is Staking Crypto Worth the Risk?

Crypto staking emerges as a dynamic and rewarding journey, offering passive income and active participation in blockchain networks. From choosing assets to navigating risks, strategic decision-making is key. Whether through independent staking, pool participation or delegation, the potential rewards make staking an enticing option for those looking to enhance their crypto journey.

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