All about Staking here on YourCryptoLibrary!

Staking

On this page we present answers to the following questions: What is staking, how does the staking process work and what are the pros and cons?

cryptolibrary-header-staking

What is staking?

Staking is when dedicate your tokens for fixed or flexible period in time in order to support the blockchain network or DeFi protocol. Staking will primarily be used by blockchains with the Proof-of-Stake – PoS consensus mechanism, where validators need staked tokens to verify transactions. Thereby creating new blocks, which are then added to the blockchain.

Investors who stake their coins contribute to the validation of these blocks. The more cryptocurrencies you stake, the more important your role in the network is and the more coins you receive as a reward for your ‘stake’.

Staking cryptocurrencies is very similar to receiving interest on your savings account. All you have to do is to store your coins in one of the staking wallets or exchanges. This makes staking one of the easiest ways to earn a return in crypto.

How does staking work?

The Proof-of-Stake mechanism is a consensus algorithm for certain cryptocurrencies. The PoS mechanism creates new blocks that are added to the blockchain. These blocks are ‘staked’ by investors who already have a certain amount of the particular coin in their wallet, which helps validate transactions on the network.

As a staker you can only mine or validate the number of coins you have staked in your wallet. This therefore means that the more coins you have staked, the more power you have to validate transactions, the more rewards you will eventually receive.

Staking coins thus provides a financial incentive, by helping to build and validate the blockchain infrastructure. Also, this helps to keep all nodes within the network on the right track because there is always a possibiliy that nodes try to insert a fraudulent transactions into the blocks.

When this is the case, other nodes in the same network will refuse to accept that fraudulent block. As a result, the node attempting to commit fraud will no longer be able to validate blocks and thus will no longer receive rewards. In most PoS networks, all coins that this fraudulent node was based on will be lost.

On which cryptocurrency exchanges can you stake your crypto? ​

What are the pros and cons of staking?​

As described earlier, staking is one of the easiest ways to earn a return and an effective way to contribute to the network. We take a look at other benefits but have to consider some disadvantages before we start staking our cryptocurrency.

Pros

  • Contributing to the operation of your favorite blockchain
  • Completely passive
  • Long term holding will be rewarded by staking profits
  • No technical knowledge is required
  • No need for investing in expensive mining equipment when you want to contribute to the (validate) blockchain network

Cons

  • Unable to to live off your passive income unless you stake whale-size amounts
  • Counterparty risk: If the exchange goes down, your cryptocurrency will go down with it

What are some staking tips? (4)

1. Be aware of volatility

Volatility is a feature of crypto. Not a bug. Be aware that high staking rates do not mean you will earn it. 

if you stake a crypto with an interest of 5% and the underlying value of that crypto falls by 20%, it will take more than 3 years before you will earn back the initial amount. Be aware that crypto can fluctuate with regularity sometimes 20% in a day.

2. Stake stablecoins

To escape heavy price fluctuations we recommend you to limit staking stablecoins. 

  • Dai
  • USD Coin
  • Binance USD
  • True USD
  • Tether
3. Be aware of variable interest

The stake rate is variable and thus can change over time. It will depend on market conditions, supply and demand. 

4. Focus on fundamental analysis

When choosing cryptocurrency to stake, it is best to pay attention to the fundamental analysis. Also try to estimate what it will do in the long run. Be aware of where you are in the market cycle before thinking long term.