Crypto Staking 101

Crypto Staking 101

No matter how much or how little experience you have with cryptocurrencies, there is a good possibility that you are familiar with the idea of staking. Staking allows you to earn income on your bitcoin holdings in a manner that is analogous to a savings account or a certificate of deposit held at a bank.

Similarly, after locking their tokens for a predetermined amount of time, Stakers are eligible to receive interest payments in the form of staking awards. When the stake is bigger, the cryptocurrency rewards are also higher.

The analogy with a savings account is only valid up to a certain point, because the objective of staking your coins is to contribute to the maintenance of a blockchain‘s normal operations and the integrity of its security through the use of a protocol known as Proof-of-Stake.

The Highs and Lows of the Staking Process

Staking can be done in a variety of different methods, and we won’t go too technical here.

Stakeholders are required to “lock up” a minimum amount of coins in order to run a “solo” (individual) node, which is a computer that validates the authenticity of transactions taking place on the blockchain and gives its approval. This was previously mentioned.

It is not possible for everyone to satisfy all three of these prerequisites in order to operate the software in a solo node, as it requires a certain amount of time, skill, and capital. For instance, in order to run a node on Ethereum and participate in staking, an initial dedication of 32 ETH, which is equivalent to about $50,000, is required.

The owner of a node runs the risk of having some of their investment reduced if they are unable to ensure that the software is operational at all times (a process also known as slashing). When you stake, one of the other ways to get penalized is by approving transactions that are dishonest.

Those individuals who are unable to satisfy the requirements for solo staking, on the other hand, have the option of staking by delegating their coins to a larger group of participants. You can earn rewards through these activities, which are also known as staking pools.

The engagement in pooled wagering is advantageous because it is less expensive and more straightforward. The disadvantage, on the other hand, is that when more people delegate, blockchains become more centralized, which in turn makes them more susceptible to being attacked.

When you participate in pool staking, one of the advantages is that you are able to withdraw your staked tokens at any time without incurring any penalties. Instead, your stake is converted into a liquid form in the form of a token that reflects the assets you have staked in the pool.

Users who stake ETH on the Rocket pool project, for instance, receive an equal amount of liquid rETH tokens in return for their investment. In the alternative, users are credited with the same version of the staked token when they participate in solo staking.

DeFi staking

We have mentioned applications that offer pooled or liquid staking as a solution for users who either don’t have enough tokens or don’t feel comfortable staking individually. These applications can be found as a solution for users who are looking for an alternative to individual staking.

Staking liquid is as simple as establishing a connection between a self-custodied wallet and a DeFi exchange and then performing a swap. In addition to the possibility of earning additional rewards through activities such as yield farming, users now have the ability to hold custody of their assets while earning income from staking. This new functionality was added recently.

Staking requires sending the tokens to a smart contract, which can be done through a DeFi project (a piece of software running on the blockchain where no central party can control the execution process). Lido and Rocketpool on Ethereum are two examples of the types of decentralized exchanges that offer staking services. Lido supports a wide variety of blockchains.

Putting Bets on Exchanges That Are Centralized (CEX)

Those who are not confident in going the DeFi route and do not want to deal with constant oversight can take advantage of the staking rewards offered by a number of the most popular cryptocurrency exchanges.

The most significant disadvantage of exchange staking is that the exchange retains a portion of the yields from the staking activity and may or may not provide an alternative liquid token. Despite the fact that exchange staking is a more convenient option, it does have the potential for some disadvantages. During the time that users are required to stake their tokens, it is expected of them that they will give the exchange complete control of their tokens.

When selecting a CEX to stake on, just as one would when selecting a DeFi option, one should take into consideration the yields on offer, the lock-up terms, the number of tokens that are supported, and the level of security provided by the platform.

Having trouble deciding which cryptocurrency exchange to use for staking? Learn more about Phemex’s LaunchPool, a choice that enables users to unstake without incurring any penalties at any time, enjoy hourly payouts, and get high staking benefits on a variety of different coins.

Staking is an excellent method for investors to earn yields on their inactive cryptocurrency holdings, particularly for those investors who are not worried with short-term fluctuation and have longer time perspectives. Investors can earn yields on their crypto holdings by staking.

However, if there is one thing that our experience in this field has taught us, it is to exercise caution when the yields are incredibly high and appear to be too good to be true. Always conduct your own research before staking your cryptocurrency on any platform, regardless of whether it is centralized or decentralized, and be aware that you run the risk of losing any funds you stake.