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Welcome to Kafycrypto, your number-one crypto news, and marketing channel. So, how is crypto staking for dummies? Let’s find out in this article.
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When most people consider investing in cryptocurrency, they consider two options: buying it directly or mining it. However, crypto staking is another way to profit in the cryptocurrency market.
However, “staking” is a relatively new concept that can be perplexing. Direct crypto investment is simple, and “mining” is a good real-world analogy for what you’re doing when you’re mining. What exactly is staking, and how can it help you make money? We’ll cover everything you need to know about crypto staking, from the fundamentals to the best crypto staking coins. Let’s begin!
What exactly is Crypto Staking?
Crypto staking is the lending of cryptocurrencies to be used as collateral by proof-of-stake (PoS) blockchains to achieve a variety of outcomes, such as extending loans, validating network transactions, earning interest, or gaining new crypto tokens as rewards (yield farming). This innovative yet risky method of essentially gaining passive income similar to interest on investment in traditional finance is helping to open up new markets for cryptocurrencies and finance new projects. It is most commonly used by Ethereum and its decentralized finance (DeFi) protocols.
How Does Crypto Staking Work?
Crypto staking is only applicable to cryptocurrencies that use the proof-of-stake model. Some cryptocurrencies, such as Bitcoin, employ a proof-of-work model in which miners must validate new blocks. However, proof-of-work systems consume a lot of energy, whereas proof-of-stake systems use a lot less.
You must first own some of the cryptocurrency you wish to stake to participate. To stake Ethereum, you must first sign up for an exchange and purchase some Ethereum.
Then you stake some currency on the blockchain. A stake is chosen to validate each new block that is added. When a new block is added to the chain, a small amount of new cryptocurrency is minted and distributed as a reward to the validator.
When you stake, the size of the stake matters, and the more you stake, the greater your potential earnings. Furthermore, the system favors larger stakes over smaller ones. As a result, not only will you earn more per block, but you will also validate more blocks overall.
Keep in mind that a higher stake means a higher risk of loss. Never invest more money than you’re willing to lose, as with any other investment.
When you stake your currency, you retain ownership and can sell it if you desire. However, most cryptocurrencies require you to stake your currency for a set period of time. Ethereum stakes, for example, are currently locked until Phase 1.5, which is not expected to launch for another 1-2 years.
What Crypto Can I Stake?
A lot! Any cryptocurrency linked as collateral via a smart contract can be staked.
PoS networks are taking over, resulting in a large number of coins available for the stake. Unfortunately, some coins lack enticing incentives, making them unsuitable for investors to lock their funds.
Stablecoin Staking
Staking cryptocurrencies such as ETH and BTC entails the risk of devaluing crypto assets. Fortunately, we can now stake stablecoins naturally free of price volatility. There are several centralized and decentralized platforms where users can lock up their stablecoins and earn passive income.
Compound Finance and dYdX are two non-custodial protocols that allow stablecoin staking.
Ethereum Staking
No staking guide would be complete without mentioning Ethereum, the leading smart contract platform. Staking on this protocol will begin in early December 2020. Ethereum was the first to abandon the PoW spirit and has been working on the transition to PoS since its inception.
To run a node on the second-largest blockchain, 32 ETH coins are required. Unfortunately, the platform does not support delegated staking natively. However, there are ways to stake with less than the protocol’s minimum amount.
Holders of less than 32 ETH must use third-party exchanges such as Binance, Kraken, or Coinbase. On Kraken, the APY ranges from 5% to 17%. According to Stakingrewards.com, the current APY is 11.21%.
How to Stake Crypto in 5 Easy Steps
Begin your crypto-staking journey by following these simple steps:
1. Choose a PoS crypto coin to stake.
New proof-of-stake (PoS) coins are appearing everywhere, making it difficult to decide which one to stake. Unfortunately, researching is an important part of a crypto investor’s journey. Take the time to learn about the risks and rewards of potential coins.
2. Prepare a staking wallet (for non-exchange staking)
To stake your crypto, you must first create a software or hardware wallet in which you can keep both your staked crypto and your earning rewards. However, if you use a centralized system that effectively controls your assets, you won’t have to.
3. Meet the coin staking requirements.
While some projects, such as Cardano and Cosmos, have no low staking threshold, others, such as Ethereum, require a significant investment (32 ETH). Make sure you have enough funds to continue staking your preferred cryptocurrency.
4. Select the appropriate hardware.
To stake your cryptocurrency, you must act as a validator node, which necessitates the use of a powerful machine that is always connected to the Internet. While a standard desktop computer should suffice, you should also consider the electricity costs. Another option is to use cloud computing via virtual private servers.
5. Prepare, set, stake
Follow the staking software instructions and keep your device connected once you’ve chosen your staked coin, created a wallet, transferred at least the minimum required coins, and set up the appropriate hardware. Congratulations, you are now earning passive cryptocurrency!
What Returns Does Crypto Staking Offer?
Crypto staking functions similarly to dividend stocks. You make an initial investment in exchange for a small but consistent stream of payments. These payments can be used as a form of passive income or staked back to the cryptocurrency in a process similar to compound interest.
A number of factors will determine your actual returns. To begin, different cryptocurrencies provide varying block rewards, which makes a significant difference. Similarly, different currencies will reserve varying amounts of supply for validators. Meanwhile, larger staking pools will earn more consistent payouts.
As with any cryptocurrency, you must consider the fiat currency value. Your staking investment will be affected if the coin’s fiat value rises or falls.
5 Popular Crypto Staking For Dummies
So, what are the best crypto-staking coins? Here are some of the most popular.
- Ethereum – Ethereum is a popular currency for spending, investing, and staking. You’ll need at least 32 ETH to start, but annual returns range from 5 to 17%.
- Polkadot – This currency was introduced in August 2020, making it less than two years old. It is intended to support multiple blockchains, and stakers can earn up to 12% per year.
- Cardano – Because the Cardano network has its own native staking pool, staking is simple. Advanced users can also create staking pools.
- Cosmos – Cosmos, like Polkadot, is intended to work across multiple blockchains. Cosmos staking has historically earned around 7% per year.
- Solana – With its on-staking program, Solana is another popular option.
The Benefits and Drawbacks Crypto Staking For Dummies
Every investment has advantages and disadvantages. Here are some reasons you may or may not want to participate in crypto staking.
Benefits Of Staking Crypto
- You earn rewards, just like when you invest in dividend stocks.
- Staking uses fewer resources than cryptocurrency mining.
- Stakers have voting rights and can vote on forking decisions.
- Staking is simple, especially if you use a staking pool.
The Dangers of Crypto Staking
- Cryptocurrency is a volatile asset that can rapidly increase or decrease in value.
- Your coin could be locked in for months or even years.
- If your validation hardware fails, you may be subject to slashing.
- Fees must be paid to your exchange or pool.
Is Crypto Staking For You?
Crypto staking can be a good or bad choice, depending on your investment strategy. First and foremost, it is a medium-to-long-term investment. Your coin will be locked up for at least a few months, if not years. If you want to make a quick buck, this may not be your best option.
However, crypto staking is relatively simple. Unlike trading, you do not have to monitor the market constantly. In addition, unlike mining, you can outsource the processing work to a staking pool, eliminating the need to build a mining rig. All you have to do is store your coin in a wallet and deposit it into your preferred pool.
Summary
Crypto staking is a method of earning money without trading or mining coins. It has some risks, as do all investments, but it also has a lot of potential upsides. Most importantly, it generates passive income. You have to stake your coin and wait for the rewards. If that sounds appealing, this investment is worth considering.
Here are some other articles that you may be interested in:
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