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What is crypto staking?

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DappRadar

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Crypto staking is when a user deposits or locks their cryptocurrency into a platform to receive rewards. In most cases, users can stake coins directly from a crypto wallet, such as MetaMask or Coinbase. Additionally, many exchanges and DeFi dapps offer staking services to their users.

Before we can dive deeper it is vital to understand the term Proof-of-Stake consensus mechanism as this forms the foundation for these activities. It is not however vital to understand in detail the technical operations being performed in the background in order to get involved in crypto staking.

Proof-of-Stake consensus mechanism 

In distributed systems, a consensus mechanism is a method by which the network agrees on a single source of truth. Comparatively, centralized systems operate on a different model where a source of truth is decided upon by an individual controller. Distributed systems rely on large numbers of autonomous authorities to cooperate in order to maintain a single network. 

Source: Leewayhurtz.com

The main idea behind a Proof-of-Stake consensus mechanism is that participants can lock crypto, and at particular intervals, the protocol randomly assigns the right to one of them to validate the next block. Typically, the probability of being chosen is proportional to the amount of crytpo – the more crypto locked up, the higher the chances.

This model ensures that which participants create a block isn’t based on a computational ability to solve hash challenges as it is with Proof of Work. Instead, it’s determined by how many staking coins they are holding.

Increased scalability

There is a valid argument that the production of blocks through staking enables a higher degree of scalability for blockchains. This is one of the main reasons the Ethereum network plans to migrate from PoW to PoS in a set of technical upgrades collectively referred to as ETH 2.0.

In fact, using the DappRadar Portfolio Tracker product we can already see how much has been staked towards the total goal.

Source: DappRadar Portfolio Tracker

Why should I stake my crypto? 

Looking at it objectively, cryptocurrencies and protocols are basically paying people to secure their networks. With staking, you usually buy a cryptocurrency or use what you already hold in order to stake or ‘lock it up’ in a smart contract. Staking rules will vary by the network but the overall arrangements are always similar. In general:

  1. The staker agrees that they’ll only validate valid transactions on the network
  2. In exchange for approving valid transactions, the network rewards the staker with a staking reward

Staking can provide users with a passive income through staking rewards and at the same time ensure a networks’ smooth operations. 

Staking rewards

Simply put, staking can be profitable, but it is vital to understand which coins can be profitably staked. You can find out the staking return, the percentage of coins staked, and more at stakingrewards.com

Firstly, it would make sense to think about any cryptocurrencies you currently hold before running out to purchase more. If, for example, you are holding Ethereum or Bitcoin, then you have immediate options in front of you. 

Secondly, comes the choice of what service to use to stake. There are distinct options usually categorized as staking through DeFi dapps, decentralized exchanges, a wallet, or specified staking provider. For newbies, it might make sense to see what features your current blockchain wallet offers at this point.

Once again we would recommend using the Staking Rewards website to look through the options available in a more detailed way. Simply use the left-hand tab to toggle through the options. 

Staking pools

A staking pool is a group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the rewards proportionally to their contributions to the pool.

Source: Uniswap

Pools may provide additional flexibility for individual stakers. Typically, the stake has to be locked for a fixed period and usually has a withdrawal or unbinding time set by the protocol. What’s more, there’s almost certainly a substantial minimum balance required to stake in order to stem any malicious activity.

Most staking pools require a low minimum balance and append no additional withdrawal times. As such, joining a staking pool instead of staking solo might be ideal for newer users.

Example: Crypto.com staking 

One example of staking can be seen through the popular Crypto.com platform. In this scenario, users can sign up to the platform and then stake a certain amount of the native CRO crypto token for 180 days. 

The lowest amount of CRO a user can stake is 2500 which at today’s rate equals approximately $150. In return for this stake, the user will receive a Crypto.com debit card, 2% back on purchases when using the card, and up to $14.99 towards the cost of a Spotify membership. It is important to note that these rewards are paid in CRO.

Here we highlighted the cheapest entry point with Crypto.com but there are higher staking rewards available that come with their own package of benefits. Once the staking period is over the staked CRO is free to be moved, exchanged, or sold.

This example should provide a clearcut example of the direct benefits of staking. In this example, the user is staking a relatively small amount of money and receiving a very tangible reward.

In-summary

The Proof of Stake consensus mechanism and crypto staking has opened up even more roads for anyone wishing to participate in the blockchain and decentralized finance movement. Moreover, it’s a very simple way to earn a passive income using your already held cryptocurrency. 

It’s essential to consider that staking isn’t entirely risk-free. Locking up funds in a smart contract is prone to bugs, so it’s always important to apply due diligence and try to use a high-quality blockchain wallet

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