What is Staking Crypto? Simple Explanation
What is Staking in Crypto?
Cryptocurrencies pay people to secure their networks. The most famous example is Bitcoin (BTC), which uses a Proof of Work (POW) mining algorithm. However, mining has downsides like high energy consumption and technical difficulty (buying and setting up ASICs requires some technical knowledge). Both of these factors can dissuade would-be miners from mining crypto.
Staking is an alternative consensus mechanism (way to verify and secure transactions) that allows users to generally secure crypto networks with minimal energy consumption and setup.
How Staking Works
With staking, you usually buy a cryptocurrency in order to lock it up (stake it) in a smart contract. Once your stake is locked up, you vote to approve transactions (in many cases, you don’t actually have to “vote” - it happens automatically). The “agreement” between the staker and the blockchain network is actually pretty simple.
While the staking rules vary by network, the following are meant to give us a general idea of a staking agreement:
- The staker agrees that they’ll only validate valid transactions on the network. I.e. they will not vote to approve double spend transactions.
- In exchange for approving valid transactions, the network rewards the staker with a staking reward.
- If a staker votes to approve illegal transactions, they may lose some or all of their stake.
This is much easier than mining and as a result, acts as a great “passive income” opportunity for those who want to support crypto networks while making mostly hands-off money.
However, while staking is a promising crypto development, keep in mind it hasn’t been around as long as mining, which has been around since 2009 (Bitcoin’s launch). That is to say, it’s still a pretty experimental (but promising!) technology.
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Staking Rewards (Potential Returns): Is Staking Profitable?
Figuring out which coins can be profitably staked is super simple, all you need to do is check StakingRewards.com. You can find out what the staking return for a certain coin is, what percentage of coins are staked, and lots of other valuable information.
Another great resource is our article, the Best Proof of Stake Coins. Find out which coins have the highest staking reward and the easiest way that you can stake them in order to start earning passive income.
Easy Tezos Staking with the Exodus Wallet
Tezos (XTZ) is one of the most popular staking cryptos and in this example, we’ll show you just how easy it can be to get started!
While there are many ways to stake Tezos, Exodus makes it super easy to do so in just a few clicks or taps. .
What is Cold Staking Cryptocurrency?
Cold staking involves staking a cryptocurrency that is stored somewhere offline, like a hardware wallet. So long as the staker keeps their crypto in the designated offline wallet, they will continue to receive the staking reward. However, if the staker moves their funds to a new address, they will stop receiving the reward.
What is Staking Ethereum?
Currently Ethereum (ETH) uses a Proof of Work consensus mechanism. However, Ethereum plans to transition to Proof of Stake. When that happens, it will allow Ethereum investors to stake their ETH and earn a passive income.
If you want to run your own staking node, you’ll need 32 Ethereum. However, services like staking pools might emerge which allow you to stake smaller amounts of ETH.
Staking Grows in Popularity
The Proof of Stake consensus mechanism is becoming increasingly popular in the cryptocurrency ecosystem. It’s greener than Proof of Work, doesn’t require an expensive investment in equipment, and the staking rewards are often quite good compared to traditional investments!
If you’d like to start staking, make sure you understand all of the risks as this is a relatively untested technology. Once you feel like you know the basics, you can start staking with a small amount of crypto and move up from there. Good luck and enjoy earning a passive income!
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.