What Is Staking and How to Earn From Holding Cryptocurrency

The concepts of cryptocurrency have gone beyond just buying, selling, and holding crypto assets. Many investors stake their tokens to contribute to the blockchain’s continuity. Over an extended period, they receive a percentage of their stake.

Staking is an easy and flexible strategy you can apply to earn more crypto or receive newly launched tokens on the blockchain. However, you need to consider the risks and limitations involved in staking your tokens.

This article helps you understand how staking works by breaking it down into simple concepts, showing you the different types of staking and how they generate earnings. It also provides a step-by-step process on how to start staking and tips to maximize your profits.

What Is Staking in Cryptocurrency?

Staking is the process of locking up a certain amount of crypto to maintain the operations of a blockchain network. It then rewards you in the form of coins or tokens for contributing to the network’s security.

As such, the staking mechanism is part of a Proof of Stake (PoS) or related consensus model. It is more like an alternative to Bitcoin’s energy-intensive Proof of Work (PoW). So, instead of using powerful mining rigs, PoS relies on those who stake their crypto to process transactions and add new blocks to the blockchain.

Staking vs. Mining: Notable Differences to Know

When people first hear about earning from crypto without trading, they often think of mining. While both staking and mining allow you to earn rewards for supporting a blockchain network, they are different.

Mining relies on Proof of Work (PoW). This is the original consensus mechanism Bitcoin used when miners solved complex mathematical puzzles. Staking, on the other hand, is based on Proof of Stake (PoS). It uses locked cryptocurrency as collateral to validate transactions.

Some popular examples of PoW tokens are Bitcoin, Bitcoin Cash, Litecoin, and Dogecoin. Moreover, Ethereum, Solana, Polygon, etc., are PoS tokens. Many online gambling platforms now accept Bitcoin Cash for deposits and withdrawals, making it a popular choice for players who value fast transactions and low fees. The table below reveals the differences between staking and mining:

Feature	Staking (POS)	Mining (POW)
Mechanism	Locks coin to validate transactions	Uses computational power to solve cryptographic puzzles
Energy Usage	Requires minimal energy	Consumes large amounts of electricity
Speed	Lets you validate transactions faster on the blockchain	Is centred around complex mathematics and large chunks of data that take time to decipher
Accessibility	Easier for beginners	Requires powerful hardware and mining machines
Environmental Impact	Minimal	Significant due to electricity consumption
Technical Complexity	Requires minimal technical knowledge	Needs advanced setup and technical skills

Different Forms of Crypto Staking

Not all staking works the same way. It depends on the cryptocurrency and platform you use. Moreover, staking is a popular innovation source in today’s crypto market. Some types are flexible and beginner-friendly, while others require more technical knowledge but offer higher returns. Below are some notable forms of staking:

Exchange Staking

Exchange staking or staking-as-a-service is when you go through a special crypto platform that handles the complexities of the blockchain. It is the most popular type of staking among traders around the world.

Many of these exchange platforms are easy to use, and they give you an edge in terms of cost. They provide advanced resources needed to track your earnings, stake more coins, and withdraw your profits easily.

On-Chain or Direct Staking

On-chain staking is an individual method of staking where you go directly to the blockchain network using your native wallet. In this case, you have to validate transactions and run nodes on your own. However, since you aren’t going through third parties, you can manage risks effectively.

Staking Pools

Staking pools are structured for multiple traders to contribute to the blockchain simultaneously. This helps you to become a validator even without adequate resources. The rewards earned will be shared fairly among everyone in the group based on your performance. In a staking pool, one person has to be elected to oversee the group’s operations and track progress.

Liquid Staking

Liquid staking is a more flexible form of staking. When you lock your tokens, the blockchain network gives you an equivalent amount in a different token to ensure that your money remains the same. This way, you still have access to your stake, and you can use it for anything else.

Risks to Consider Before Staking

Everything about cryptocurrency comes with risk. However, risk tolerance is not the same for everybody. So, it is essential to know what you’re getting involved in and be prepared for it. Below are some risks to consider before you go into crypto staking:

Volatility of Token Prices

The crypto market is extremely volatile, and token prices can rise or fall unexpectedly. This puts you in a blind spot, as you can’t predict the future outcome of the token you’re staking.

Long Lock-Up Periods

When you stake your tokens, the withdrawal process takes a specified timeframe. It could last weeks or even months. During the lock-up period, you typically stop earning, and you risk being exposed to the harsh, unpredictable conditions of the crypto market.

Token Slashing

As a validator, the blockchain holds your tokens to ensure that you maintain transparency during transactions. Failure to comply with transparency or incorrect operations can lead to a penalty, resulting in a loss of a percentage of your tokens to the blockchain.

Fraudulent Attacks

Nowadays, traders are susceptible to various cyber attacks. Hackers use viruses and other deceptive methods to infiltrate crypto wallets and steal private keys. Once your private keys are compromised, your tokens can be easily stolen.

How to Start Staking: a Step-by-Step Guide

Unlike many other aspects of cryptocurrency that require in-depth knowledge, you only need to understand the basics of staking to start earning. Follow the steps below to start cryptocurrency staking in no time:

Step 1: Start by choosing tokens, like Ethereum, Solana, etc., that support staking.
Step 2: Choose your preferred staking method based on your knowledge and resources.
Step 3: Set up an active crypto wallet to hold the tokens you purchase and earn.
Step 4: If you want to use a crypto exchange, look for reliable platforms that don’t just support staking but also provide adequate infrastructure.
Step 5: Stake an amount of your tokens and track from time to time to monitor your earnings.
Step 6: Cash out your profits after an extended period.

Smart Tips to Maximize Your Earnings in Crypto Staking

The average percentage of staking bonus you can earn ranges from 4% to 15% per year. It all depends on the structure of the blockchain you choose. However, you can implement some smart strategies to increase your earnings over time. Below are things to do to increase your earning potential:

Compare the annual percentage yield (APY) of different tokens before making a choice.
Avoid crypto exchanges that charge high transaction or withdrawal fees.
Reinvest your profits and diversify into other tokens to increase yield over time.
Join staking pools to gain access to more resources, even with less.
Use smart tools and market dashboards to track price changes within the crypto market.
Prioritize flexible or liquid staking to reduce the damage of lock-up periods.

Conclusion

Staking is an excellent way to put your cryptocurrency to work while supporting your trusted projects. It offers the appeal of passive income and the potential for compounded returns over time.

However, it’s essential to balance rewards against risks. Conduct adequate research before investing your money in any token. This can help you position yourself for long-term success and determine the projects that will succeed or fail on time.