What is Crypto Staking?

Staking offers crypto users a way to put their digital assets to work, earning passive income without the need to sell and holdings. Staking crypto is similar to putting money into a savings account to generate interest. In the traditional banking system, your deposit is loaned to others, and you receive a portion of the interest. With crypto staking, you deposit coins into a smart contract to help run the blockchain and fortify its security. In return, users who stake their crypto are paid lucrative rewards – often in the form of more crypto. This makes staking a popular option for HODLers as they can use the power of compound interest to grow the size of their holdings.

How does staking work?

Staking is only possible via the proof-of-stake consensus mechanism, which certain blockchains use to choose honest participants to verify new blocks of data being added to the network. These participants are known as validators or stakers

There are a wide variety of ways that staking has been implemented. Just about every blockchain uses its own method! For instance, staking ETH and staking FTM function somewhat differently.

To become a validator, participants must purchase and lock a certain number of tokens. The network chooses validators based on the size of their stake and the length of time they have held it. This means that if a validator has a higher number of tokens staked, they have a better chance of proposing a new block and collecting the reward. This method incentivizes validators to act in the network’s best interest because if a validator attempted to compromise the network, they would also be compromising their staked holdings. If a validator is found to be misbehaving, they can have their rewards paused. In more severe situations, validators can have their stake slashed or reduced to zero!

Delegated staking lowers the barrier of entry for more users to participate in staking. This involves validators running staking pools to raise funds from a group of token holders. The staking pool operator will then organize and maintain the necessary resources to run a validator. For this service, the staking pool operator usually takes a small cut of the rewards.

When compared to the proof-of-work consensus method, proof-of-stake can support faster, more complex transactions with a much lower environmental impact.

How are staking rewards calculated?

If a cryptocurrency you hold allows staking, you can stake some of your holdings to earn a percentage-rate reward over time. Let’s say you deposit 100 FTM into a staking pool. We’ll assume the reward rate remains constant at 4.4%. After one year of staking, you could expect to earn 4.4 FTM as staking rewards. 

Which cryptocurrencies can I stake?

Staking is only possible with cryptocurrencies operating with a proof-of-stake consensus mechanism. The most widely known staking cryptocurrency is Ethereum. At the time of writing, here are some of the top cryptocurrencies by staking market cap (the cryptocurrencies with the most value staked):

AssetReward RateStaking Marketcap
Ethereum (ETH)4.09%$18,991,854,156
Solana (SOL)5.57%$14,498,399,273
Avalanche (AVAX)8.38%$5,095,271,896
BNB Chain (BNB)5.05%$4,767,190,359
Polkadot (DOT)14.12%$4,297,365,156
Tron (TRX)3.49%$2,809,072,228
Polygon (MATIC)1.48%$2,133,767,542
Algorand (ALGO)7.09%$2,027,261,438
Cosmos (ATOM)18.02%$1,821,793,310
NEAR Protocol (NEAR)10.6%$1,611,611,291
Fantom (FTM)4.4%$401,774,833
Top Cryptocurrencies and their reward rate by staking marketcap (July 2022)

For a comprehensive list of eligible cryptocurrencies, the current rewards rate, and guides on how to stake, check out Staking Rewards

Risks of Staking Crypto

Staking crypto is not risk free! Here are some notable risks in staking your crypto:

  • There are minimum lock-up periods on some coins which prevent you from withdrawing your assets freely.
  • When withdrawing crypto from a staking pool, there can be waiting periods before receiving your coins.
  • As the price of crypto is volatile, price drops could outweigh the value of staking rewards.
  • If the validator you choose misbehaves, you could receive fewer rewards or be exposed to slashing. This means you could lose the crypto that you stake in the pool.
  • Staking pools could be hacked resulting in lost assets.

Conclusion

Staking is a great option for long-term crypto holders who are not bothered by short-term price action. By utilizing the magic of compound interest, these HODLers can multiply their holdings whilst supporting the security of the network. Just remember, before you dive in, do your own research! 

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