The world of decentralized finance (DeFi) is a vast and interesting one that has helped to reshape traditional finance in more ways than you would expect it to have. By now, investing and trading are the most recognizable activities in cryptocurrency. 

However, many newcomers to crypto may not be familiar with the concept known as ‘staking’. Staking coins has only been around since 2020, making it a fairly new idea in the world of DeFi. 

Staking is incredibly popular in crypto. To put it into perspective, 23.5 million Ethereum tokens have been staked up until 2023, worth around $38 billion. 

By the end of this article, you will no longer be thinking, “What is staking?” and will instead be saying, “I know what staking is!”. We will cover what crypto staking is, the different staking coins available, the different staking protocols available, and the pros and cons of staking cryptocurrency. 

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What is staking in cryptocurrency?

You want to know “What is staking?” and what it means in the world of crypto. Let us explain. 

Staking is the act of handing over your cryptocurrency assets to their native blockchain, in order to help with the maintenance, security and efficient running of the network. Users on staking platforms lock up their crypto holdings for a set amount of time, anywhere from 7 days up to a full year or more, depending on the cryptocurrency, staking platform and blockchain. 

The main aim of staking on the blockchain is to ensure that data and transactions are legitimate. The individuals who oversee this function of staking are known as ‘validators’, because they  validate the transactions. 

Staking coins is then used as collateral. There may be instances where illegitimate information and/or transactions are validated on the blockchain. When this happens, the staked cryptocurrency is paid off as a penalty for the inaccuracy. 

As a reward for your contribution to the blockchain, you are able to earn more crypto on top of your initial balance. It is similar to a bank buying bonds with your savings, and then earning an annual APY percentage on top for using their savings account. 

A key difference, though, between a traditional bank and the blockchain is the earning potential. Staking coins is renowned for more generous returns. However, it could also be seen as more risky than traditional banking due to the volatile nature of the crypto markets and lack of clear regulation in some countries..

Crypto staking is one of the many ways you can maximize the use of cryptocurrency assets. Since 2020 staking has become increasingly popular thanks to the array of staking coins and staking protocols available for investors. 

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Which crypto can I stake?

So you like the sound of staking, you earn more from crypto without having to trade, offering a new way to use blockchain assets. Your next question may be, “What crypto can I stake?”

When staking coins, you need to know which cryptocurrencies are capable of staking.. 

For a cryptocurrency to be staked, it must use the Proof of Stake (PoS) consensus mechanism. 

The mechanism allows transactions to be processed on the blockchain, along with new blocks being created and added. We will cover PoS in more detail in our article. 

Here is a list of cryptocurrencies you can stake on Cryptology, along with the Annual Percentage Rate (APR): 

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As seen above, the returns on cryptocurrencies depend on the different tokens. 

A look at Proof of Stake in more detail

Proof of Stake builds on the Proof of Work (PoW) consensus mechanism that was initially created with Bitcoin. With PoW, instead of validators locking up crypto to process transactions and ensure blockchain performance is maintained, miners use computational power to secure the network, process transactions, and add new data blocks to the chain.. 

This proved not to be as eco-friendly after many years of using PoW protocols to enhance Bitcoin’s network. So when Bitcoin’s predecessor, Ethereum, was made back in 2013, the overall cost of consensus mechanism protocols was brought down thanks to users bringing their own crypto to the table to ensure the job was done!

Now we have new staking protocols that are constantly evolving to enhance the staking procedure, offering more generous returns and a better blockchain experience as a result of its expansion. 

How can I start staking? 

So you want to actually stake some crypto now that you have a better understanding of what it is. Luckily, there are multiple ways for you to stake cryptocurrencies, which is good for those who may have less technical knowledge of crypto compared to others. 

Before you begin staking, you need to purchase the crypto you want to stake. Ensure first that the crypto is in line with the PoS that we mentioned earlier in the article, otherwise, you may find it unstakeable.  

If you are unsure if a crypto can be staked, either visit the project's official site to view their whitepaper or, alternatively, go to a site like CoinMarketCap to read the crypto token’s briefing so you can understand the project in more detail. 

Your next step is to work out which staking platform is best for you. The type of crypto staking platform you choose will depend on your understanding of cryptocurrencies and blockchain. 

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Centralized exchanges

We will begin with a simple way for a user to stake their crypto tokens. 

If you are new to crypto, you will want to stake via a centralized exchange. It is a convenient way to stake a lot of the work done by the exchange in terms of setting up the staking and ensuring that all runs smoothly. 

This essentially takes a lot of weight off your shoulders if you lack the technical know how. Simply deposit your crypto holdings onto a centralized exchange, which will then look after your private keys to access your crypto assets. Common examples include Binance and Coinbase. 

Your crypto is added to a liquidity pool on the exchange, which is then put to work on the blockchain to earn you those lucrative APY returns!

Once your lockup period is complete and the transactions are all verified, you will be notified of your crypto staking rewards. Different exchanges have different lockup periods; however, some exchanges actually have flexible arrangements, allowing you to withdraw when you please. 

Always check the staking protocol’s terms and conditions to find out! 

Pros 

Accessible for beginners due to private keys being looked after by exchanges.

A wide range of cryptocurrencies can be staked on centralized exchanges. 

You don’t necessarily need many tokens to begin staking. 

Cons

You may incur extra fees when staking on a centralized exchange - leading to lower rewards. 

If an exchange doesn’t stake correctly, there is a chance you will pay a penalty on their behalf. 

If, for whatever reason, an exchange goes bust, you will lose your funds. Be sure to choose a stable, trustworthy exchange!

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Decentralized exchanges (DEX)

There is another alternative method to staking coins, and this is on a decentralized exchange. This is a more complex way to stake crypto, but it is worth knowing about in case you become more knowledgeable of cryptocurrencies!

When staking on a DEX, this staking platform helps set up validators for your convenience. However, this time you have direct access to your private keys, giving you more ownership over the staking process and more control of your assets. 

You need a wallet that supports staking. Many DEX platforms have integrated wallets, but you can also use compatible external wallets. Ensure the wallet is compatible with the cryptocurrency you wish to stake. 

Examples of external wallets would be:

• MyEtherWallet
• Trust Wallet 
• Ledger 
• Trezos

Pros 

More choice when staking crypto on DEXs. Newer and/or niche coins are more likely to be listed for staking. 

Staking rewards are not released to the staking protocol but rather to your own wallet once the lockup period has ended.                                              

There is no KYC verification needed on the exchange, as your non-custodial verifies your identity.

Cons

Higher transaction fees will be found on DEXs compared to CEXs. 

DEXs tend to need specific knowledge for staking, leaving newbies scratching their heads. 

Anyone can list a coin on a DEX which increases chances of users being scammed.

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What benefits and risks are there with staking?

Staking coins brings many positive benefits when it comes to decentralized finance, but there are also drawbacks. It is good practice to be aware of both sides of crypto staking before opting for it!

The benefits of crypto staking

1. Earning rewards: One of the main benefits of crypto staking is the opportunity to earn rewards. Validators or stakers are often rewarded with additional coins or tokens as an incentive for participating in the network's consensus mechanism. These rewards can vary based on factors like the network's inflation rate and the amount staked.

2. Passive income: Staking allows users to generate a passive income stream from their cryptocurrency holdings. Instead of just holding the coins and waiting for their value to increase, stakers can earn regular rewards for their participation in securing the network.

3. Network security: Staking is usually associated with Proof-of-Stake (PoS) blockchains, which rely on validators to secure the network. By staking and participating in the validation process, users contribute to the network's security and decentralization.

4. No special hardware is required: Unlike mining in Proof-of-Work (PoW) blockchains, staking does not require expensive and power-hungry mining hardware. Anyone with the minimum staking amount can participate in the network.

5. Liquidity: In some cases, staked coins might remain relatively liquid. Some staking protocols allow users to "unstake" or withdraw their staked coins from the staking platform with a short waiting period, making them accessible if needed.

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The drawbacks of crypto staking

1. Risk of slashing: In certain PoS networks, validators can be penalized for malicious behavior or failing to follow the protocol rules. This penalty is called "slashing" and can result in the loss of a portion of the staker's funds.

2. Locked funds: When you stake your cryptocurrencies, the staked amount is locked up for a specified period, depending on the network. During this period, you may not have access to those funds or use them for other purposes.

3. Market volatility: The value of the staked coins may fluctuate during the staking period. While earning rewards is beneficial, the overall value of the staked assets could decrease due to market volatility.

4. Network risk: Staking on a new or relatively untested network carries the risk of potential vulnerabilities or bugs in the staking protocol, which could lead to financial losses.

5. Regulatory uncertainty: The regulatory landscape around staking cryptocurrencies can be uncertain in some jurisdictions. Depending on the local regulations, staking might be subject to taxation or other legal implications.

We hope that after reading this guide on what staking is, you will feel more comfortable using crypto staking to earn more rewards and give back to the blockchain ecosystem. 

Staking protocols have allowed the blockchain to flourish and added incentives for users to join the wider blockchain and even specific blockchain ecosystems, although this depends on what the user wants out of their stake experience. 

Of course, with anything related to crypto, there are leaps and bounds that must be addressed. Overall, staking is a worthwhile feature of the blockchain that enables users to get the most out of their investments. All while contributing to their favorite blockchain networks

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FAQs

‍How can I start staking?

Begin staking your crypto by purchasing the crypto you wish to stake. If you are inexperienced, then opt for a centralized exchange that will do a lot of the work for you. Or alternatively, if you understand staking, opt for a decentralized exchange that gives you more leeway and responsibility over the staking process. 

‍Is crypto staking safe?

Staking crypto can have security risks or even fall victim to market volatility. As long as you take the necessary steps to stake crypto, you will be good to go. Always research the platform you choose to stake your claim on, ensuring you understand their processes.

‍Is crypto staking smart?

Cryptocurrency staking is a smart way to earn passive income and extra rewards from the blockchain. Furthermore, contributing your crypto enables transactions to be processed and the network’s performance to be maintained.  

‍Is staking profitable?

Yes, crypto staking can be profitable. It will depend on which cryptocurrency you stake, the platform, and overall market conditions. 

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