What is staking? Explaining the most popular “passive income” strategy in crypto

Crypto staking is one of the most misunderstood concepts in the blockchain industry. Staking has become a buzzword enticing holders and investors to lock in their tokens with the promise of generous passive income and crypto rewards.

Many bonus contracts and bonus platforms technically do not offer any bets at all. You can’t bet Bitcoin (BTC)For example, be careful with any provider that tells you this is possible.

Crypto staking is a broad topic, with different blockchain networks living by slightly different staking rules. What is true for Ethereum (ETH) Staking is not set on stone Cardano (ADA).

with the SEC crack down On cryptocurrency exchanges such as Kraken and Coinbase On their staking software, there has never been a better time to revisit the basics.

What is staking in cryptocurrency? What does proof of stake on the ground mean and what are the risks?

What is Crypto Staking?

Staking cryptocurrency is a popular way to earn passive income from your digital assets. Many cryptocurrency investors like to see it as a type of savings account, where you can earn APY (Annual Percentage Return) by collecting coins.

Despite the volatility inherent in the cryptocurrency market, staking helps holders grow their crypto investment over a long period of time. They do not need to actively trade or inject new capital into their portfolio to increase their exposure.

But as the saying goes: “There is no such thing as a free lunch.”

Where do these generous interest rates and seemingly endless bonuses come from?

Proof of stake consensus mechanism

The PoS consensus, unfortunately, is not a group of friends telling you whether your beef is rare or medium rare. It is the process used by many blockchains to secure the network and produce new blocks.

In general, a network validator is a person who installs coins in the blockchain to help decentralize the network and verify transactions. To ensure the security of the network and to produce new blocks, validators earn staking rewards. These rewards are generally new codes that enter the offer based on the network’s emission schedule.

In a proof-of-work blockchain, such as Bitcoin, miners solve complex mathematical puzzles to compete for the right to create new blocks and earn mining rewards. This is why successful bitcoin miners take so much energy.

source: Ethereum

To give you an idea of ​​how much energy the Proof-of-Work chain uses, Ethereum has reduced its consumption by 99% after moving to a PoS consensus.

On the other hand, PoS chains randomly select a validator for each new block. This process uses much less power than Proof of Work (PoW) and incentivizes cryptocurrency investors to buy more crypto assets, thus increasing their chances of winning a staking reward.

This is a win-win exercise, as the blockchain attracts a larger group of transactors and decentralizes the operation of the network, while stakeholders earn cryptocurrency rewards and help support the ecosystem.

How much cryptocurrency can I earn with Staking Rewards?

Cryptocurrency interest rates vary between different blockchains, service providers, and lockout periods. Generally, bonuses range from 4-18% APY. sites like StakingRewards.com Compilation of data to tell us where the best pure staking opportunities are located. However, it does not include options from centralized exchanges.

In some cases, cryptocurrency exchanges will offer hostage rewards at enhanced rates to entice holders to lock in their stacked coins for longer periods of time.

For example, the cryptocurrency exchange offers 35% APY if we are willing to lock out our Cosmos (ATOM) tokens for 120 days, but only 1% for a flexi deposit.

What are the risks of staking?

As with every corner of the cryptocurrency space, staking comes with its own risks. For example, if you delegate your tokens to a bad validator, you may be at risk of being “slashed”. Slashing is a defense mechanism used by Stack protocols to ensure validators are behaving correctly and performing their tasks.

if it was Polka Dot The checker misbehaves and runs malware, his share is at risk of being “cut off”. If this happens, part of their share is forcibly removed and given to the protocol treasury.

Each staking network and protocol has its own slashing rules, so if you’re running a validator it’s worth checking what might put you at risk.

Other risks include loss of value due to price fluctuations. If you lock in your staking coins for a long period of time, you may find yourself unable to sell quickly in the event of a black swan event.

source: CoinMarketCap

Remember when LUNA crashed from $80 to a few cents in just a few days? Thanks to the 14-day opening period, thousands of LUNA customers could do nothing but watch their belongings burn to the ground before their eyes.

The same goes for those who share their currencies through centralized exchanges. When FTX collapsed, anyone storing their cryptocurrencies through staking FTX pools had no access to their assets.

Myths and misconceptions about cryptocurrencies

Like any misunderstood crypto topic, there is a lot of misinformation out there that can mislead you. Some of this confusion centers around the definition of staking drifting away from its original purpose and applying it loosely to any circumstance where you deposit tokens in exchange for rewards.

Let’s highlight some of these misconceptions.

“I can buy my tokens in DeFi apps to earn other tokens”

While you can deposit some tokens into DeFi applications, such as liquidity farms, to earn other tokens, this is not technically the case. In this example, PancakeSwap says we can earn tokens by placing the original CAKE token into staking pools.

What we’re actually doing here is depositing a cookie into a file smart contract and gain emissions from other tokens. We do not help secure a blockchain that does not exist CAKE. DeFi apps like PancakeSwap offer these “storage pools” as they bring interest and demand for CAKE tokens.

“Collecting my codes means I don’t control them anymore”

In many cases, staking cryptocurrency means delegating it to a validator who will use it on your behalf. But some networks, like Cardano, don’t follow this rule.

Staked ADA never leaves your crypto wallet, making it one of the most secure staking protocols on the market.

Staking Rewards is consistent and accurate.

Just because staking emissions are fixed and regular, it does not guarantee that your checker will be chosen at random and will get its estimated rewards. This is more a matter of stats than anything else, so if you’ve been flirting for the long haul, you probably won’t even notice.

source: Solana Dukes

It is worth noting that Staking APY does not take into account nominal inflation and emissions. For example, Solana’s nominal inflationary emission rate means that the supply of Solana increases by 1.5-5% each year.

Even though you could earn 6-8% APY by buying SOL, the supply is still inflated and it is likely to lose value. Some cryptocurrency enthusiasts prefer to calculate their rewards by subtracting the tokens’ inflation rate from the original APY.

“I can bet NFTs to earn cryptocurrency”

Like PancakeSwap, this is a liberal use of the phrase “stake”. Yes, you can deposit Monkey Yacht Club Boredom NFT is in a smart contract to earn $APE tokens, but you are not helping anyone to secure the network and produce new blocks.

Cyberkongz earn $BANANA, DeGods earn $DUST, Neo Tokyo Citizens earn $BYTES, and the list goes on. Why do so much NFT groups do this?

Depositing NFTs into betting contracts takes them out of the market and makes available supply seem even scarcer. A group with only 2% of the total supply listed looks like a much more desirable asset than a group with 20% of its lots for sale.

Crypto staking pros and cons

Staking Cryptocurrency is a very subtle topic, with a lot of moving parts and set rules. To make it easier to understand why caching is particularly interesting to you, here are the benefits and drawbacks.

Positives

• passive income Staking Cryptocurrency is a great way to earn passive income and grow your holdings organically with minimal risk.
• insurance blockchain – By storing your cryptocurrency, you help validators create new blocks and protect the network from malicious elements
• Decentralization of the network The more validators a blockchain has, the less likely it is to experience a central point of failure. This also helps distribute ownership and management of the chain itself.
• Increased rarity of tokens – Cryptocurrency mode takes your coins out of the market and reduces the number of tokens available to buyers. In a bullish market scenario, this creates a good environment for the price to rise.

cons

• confinement periods – For the most attractive staking rewards, you will usually need to lock in your tokens for an extended period of time. This is problematic if you find yourself needing to sell quickly
• Give up complete control of your money – In most cases, staking means that you need to deposit your crypto into a staking contract. To be honest, this sounds scarier than it actually is. Validation hacks are uncommon, and operators have a vested interest in the security of the chain they are validating.

How can I start putting my cryptocurrency in?

Almost every cryptocurrency exchange offers cryptocurrency in some form or form. If you want to start storing cryptocurrency for the first time, this is by far the easiest way.

Your favorite crypto exchange should have an “Earn” section where you can browse available staking subscriptions. All you have to do is search for the cryptocurrency you want to share and choose a lock-up period that you are happy with.

Running your checker is a different story. This can get very complicated, especially if you don’t have a background in development. The best place to start looking for answers is in the blockchain developer docs of your choice.

on the flip side

• Cryptocurrency bets, like any financial growth strategy, have their risks. Everyone would love to get cryptocurrency for free, but that doesn’t mean you should trust everything at face value. Be careful when choosing your staking provider.
• As explained above, the term “staking” has deviated far from its technical definition. These days, staking is used to describe most circumstances where you deposit digital assets in exchange for some kind of token reward, rather than contributing to a Proof-of-Stake network.

Why should you bother

Cryptocurrency stacking helps decentralize and support your favorite blockchain ecosystem while rewarding you with tokens. It is important to understand what staking is and how it works to ensure that you are “putting your cryptocurrency to work” safely.

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