What Is Staking In Crypto? A Beginner’s Guide
- Staking is a way for crypto holders to put their crypto assets to work and generate a passive income without having to sell their coins.
- Staking is only possible through the proof-of-stake consensus mechanism, which certain blockchains use to select honest members and validate new blocks of data added to the network.
- Decentralized cryptocurrencies have no central authority. How do all the computers in a decentralized network arrive at the correct answer without a centralized authority? A “consensus mechanism” is used.
- Staking is an effective strategy for long-term investors who aren’t too worried about daily price fluctuations but still want to earn returns on their holdings.
What is Staking?
Staking allows crypto holders to put their crypto assets to work and earn passive income without having to sell them. Staking is similar to saving money in a high-yield savings account in crypto. When you deposit money into a savings account, the bank often lends it to others. You receive a percentage of the interest gained by lending in exchange for locking up that money with the bank – although a tiny portion.
Similarly, when you stake your digital assets, you are locking up the coins to participate in the operation and security of the blockchain. In exchange, you will be rewarded in percentage yields. These returns are generally greater than any interest rate offered by banks.
Staking has grown in popularity as a solution to benefit from cryptocurrency without trading coins. According to Staking Rewards, the total value of crypto assets staked had surpassed the $280 billion threshold as of April 2022.
How Does Staking Work?
Staking is only possible through the proof-of-stake consensus protocol, which is utilized by certain blockchains to select honest participants and validate new blocks of data added to the network.
By requiring these network users, known as validators or “stakers,” to purchase and store a specific amount of tokens, it makes it difficult to perform dishonestly in the network. If the blockchain was corrupted in any way by criminal activity, the native token connected with it would most certainly lose value, and the alleged attacker would stand to lose money.
Meanwhile, the stake is the validator’s “skin in the game” to ensure they perform honestly and for the interest of the network. In return for their contribution, validators receive rewards paid in the native coin. The bigger their stake, the more likely they are to propose a new block and reap the rewards. After all, the more skin you have in the game, the more likely you are to be an honest participant.
To keep validators in check, they can be penalized for minor violations like remaining offline for extended periods. They can even be suspended from the consensus process and have their funds taken. The latter is known as “slashing,” It has occurred on some blockchains, including Polkadot and Ethereum.
Every blockchain has its own set of rules for validators. Proof-of-stake (previously known as Ethereum 2.0) for example, requires each validator to stake at least 32 ether, which is worth more than $100,000.
How Are Staking Rewards Calculated?
Each blockchain network may use a different way of calculating staking rewards.
Some are adjusted on a block-by-block basis, taking into account many different factors. These can include:
- how many coins the validator is staking
- how long the validator has been actively staking
- how many coins are staked on the network in total
- the inflation rate
- other factors
For some other networks, staking rewards are determined as a fixed percentage. These rewards are distributed to validators as a sort of compensation for inflation. Inflation encourages users to spend their coins instead of holding them, which may increase their usage as cryptocurrency. But with this model, validators can calculate exactly what staking reward they can expect.
A staking reward schedule is also possible and may look favorable to some. For example in the Cardano network, staking rewards will be obtained at the end of each epoch which usually lasts 5 days.
Why is Staking Available in Only Some Cryptocurrencies?
This is when things start to get technical. Staking is not permitted in Bitcoin, for example. To understand why, some background is required.
Cryptocurrencies are often decentralized, meaning no centralized authority is in charge. So, how do all of the computers in a decentralized network arrive at the correct answer without being given it by a centralized authority such as a bank or a credit card company? They employ what is known as a “consensus mechanism.”
Proof of Work is a consensus mechanism used by many cryptocurrencies, notably Bitcoin and Ethereum 1.0. The network uses Proof of Work to direct massive amounts of computing power toward challenges such as authenticating transactions between strangers on opposite sides of the globe and ensuring that no one spends the same money twice. Part of the process involves “miners” from all around the world competing to solve a cryptographic problem first. The winner wins some cryptocurrency in exchange for the opportunity to add the most recent “block” of validated transactions to the blockchain.
Proof of Work is a scalable method for a very simple blockchain, such as Bitcoin’s (which acts similarly to a bank’s ledger, tracking incoming and departing transactions). However, for anything more complicated, such as Ethereum, which has a vast range of apps operating on top of the blockchain, including the entire world of DeFi, Proof of Work can produce bottlenecks when there is too much activity. As a result, transaction times may be extended and fees may be increased.
Risks of Staking Crypto
There are risks to consider with any investment, particularly in cryptocurrency.
- Cryptocurrencies are highly volatile. Price drops can easily outweigh the benefits you receive. Staking is ideal for people who intend to hold their assets for the long term, regardless of market fluctuations.
- Some coins have a minimum lock-up period during which you cannot remove your staking assets.
- If you wish to withdraw your assets from a staking pool, each blockchain has a different waiting period before you can get your money back.
- The staking pool operator poses a counterparty risk. You may miss out on incentives if the validator fails to do its job effectively and is penalized.
- Staking pools can be hacked, resulting in the loss of all cash staked. And, because the assets are not insured, there is little to no chance of compensation.
How Profitable is Staking?
Staking is an effective method for long-term investors who aren’t overly concerned with daily price changes but want to generate yields on their holdings.
The data shows that the average yearly yield for the top 261 staked assets is greater than 11%. However, it’s essential to keep in mind that incentives might shift over time.
Rewards might be impacted by fees as well. The overall percentage yields are affected since staking pools deduct fees from the rewards for their efforts. This varies considerably depending on the specific pool and blockchain in question.
Selecting a staking pool with a good reputation for validating many blocks at a reasonable commission rate will help you earn the most money. The latter reduces the possibility that the validation procedure will be suspended due to the pool’s violation.
Staking can be one of the ways to get passive income for long-term investors and add the benefit of contributing to the security and efficiency of the blockchain projects you support.
How to Stake on NOBI?
You can also stake any crypto assets on NOBI Earn feature. Recently, NOBI has launched a new NOBI Earn feature. With this new Earn, you can get some benefits, including rewards distribution every Monday, zero fees, and a more informative interface. NOBI Earn has no lock-in period. This means you have the privilege to withdraw your funds anytime you want, earn attractive rewards, with a minimum deposit of only IDR 20,000.
You could hold your coins while earning on NOBI Earn and you have different crypto assets to choose from. What’s more, it’s an easy way to earn by simply holding digital assets. Check out NOBI Earn to see which coins are supported for staking and start earning rewards today!
- Krisztian Sandor, Crypto Staking 101: What Is Staking?, accessed on September 15, 2022.
- Lyle Daly, What Is Staking in Crypto?, accessed on September 15, 2022.
- David Rodeck, Crypto Staking Basics, accessed on September 15, 2022.