On this page, we’ll answer the following questions: What is staking? How does the staking process work? What are its pros and cons?
Staking involves dedicating your tokens for a fixed or flexible period of time to support a blockchain network or DeFi protocol. Primarily used by blockchains employing the Proof-of-Stake – PoS consensus mechanism, staking allows validators to use staked tokens to verify transactions, creating new blocks to be added to the blockchain.
Investors who stake their coins play a role in validating these blocks. The more cryptocurrencies you stake, the more significant your role in the network becomes, and the greater the number of coins you receive as a reward for your ‘stake’.
Staking cryptocurrencies is similar to earning interest on your savings account. You simply need to store your coins in a staking wallet or on an exchange that supports staking. This makes staking one of the easiest ways to earn returns in the crypto world.
The Proof-of-Stake (PoS) mechanism is a consensus algorithm used by certain cryptocurrencies. It creates new blocks to be added to the blockchain. These blocks are ‘staked’ by investors who hold a certain amount of the specific coin in their wallet, which assists in validating transactions on the network.
As a staker, you can only mine or validate block transactions equivalent to the number of coins you have staked in your wallet. This means that the more coins you have staked, the greater your power to validate transactions and the larger the rewards you stand to receive.
Staking coins provides a financial incentive by contributing to the construction and validation of the blockchain infrastructure. It also helps keep all nodes within the network on the right path, as there’s always a possibility of nodes attempting to insert fraudulent transactions into blocks.
Should this occur, other nodes in the network will reject the fraudulent block. Consequently, the node attempting fraud will lose its ability to validate blocks and will no longer receive rewards. In most PoS networks, all coins staked by this fraudulent node are typically forfeited.
As previously mentioned, staking is one of the simplest ways to earn returns and contribute to the network. However, before we delve into the benefits of staking, it’s important to understand that it also comes with certain drawbacks. Let’s explore both the advantages and the disadvantages of staking your cryptocurrency.
Remember, volatility is a characteristic of cryptocurrencies, not a bug. High staking rates do not guarantee corresponding earnings.
For instance, if you stake a cryptocurrency offering a 5% interest rate and the underlying value of that crypto falls by 20%, it will take over three years just to recover your initial investment. Keep in mind that cryptocurrency values can fluctuate significantly, sometimes by as much as 20% in a single day.
To avoid heavy price fluctuations, we recommend limiting your staking to stablecoins. Some options include/
The staking rate is variable and can change over time, depending on market conditions and supply and demand dynamics.