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Looking for a way to put your crypto to good use? Staking makes it possible to earn passive income with crypto you already own. Hereâs what you need to know about it:
What is staking?
Staking is the act of pledging your crypto to help secure and verify transactions on a blockchain. In return for this, you earn rewards from the network.
The benefits of staking
There are several benefits to staking your crypto:
- Passive income. Staking is mostly a passive activity, which means you can earn rewards without having to do much (or any)Â work.
- Returns. Staking typically offers a higher return on investment (ROI) than simply holding crypto, especially if the staking wallet compounds your interest.
- Participation. You can support the network you believe in and help it grow.
- Low cost. Staking can help you earn rewards more cheaply than mining, as staking requires less computing power and no specialized equipment.
The risks of staking
There are a few risks to consider before staking your crypto:
- Volatility. The value of your staked assets can go up or down, just like any other crypto asset.
- Loss of control. Once youâve staked your assets, you wonât be able to access them until you unstake them (which usually takes a set period of time).
- Slashing. If a validator sends invalid transactions, the network may penalize, or âslash,â parties who would otherwise receive rewards. This is meant to discourage bad behavior on the network.
Proof-of-stake vs. proof-of-work
Staking only happens on cryptocurrency networks that use the proof-of-stake model as their consensus mechanism. A consensus mechanism is the process that a blockchain network uses to process payments, confirm transactions, and add new blocks to the chain.
The two most common consensus mechanisms used by cryptocurrencies are proof-of-work (PoW) and proof-of-stake (PoS).
Proof-of-work
PoW is the method of choice for early cryptos, including Bitcoin.
In PoW systems, participants compete to solve complex mathematical problems. The first person to solve the problem adds the next block to the chain and receives a reward. PoW is a very energy-intensive process, as it requires miners to run powerful computers 24/7.
Winning the block reward comes down to âoutcomputingâ others.
Proof-of-stake
PoS is a more eco-friendly way to verify transactions.
In PoS systems, participants pledge their crypto assets to help secure and verify transactions on the network. The more assets you stake, the higher your chances of being chosen to add the next block to the chain.
This process requires neither specialized hardware nor additional computing power.
PoS systems also have different staking rules than PoW systems. For example, some PoS networks require participants to lock up their staking rewards for a set period of time, while others allow stakers to claim their rewards as they earn them.
In sum, staking lets you support a blockchain networkâââand get passive rewards for doing soâââwithout expending large amounts of energy.
How staking works
When you stake your crypto, youâre essentially holding it in a wallet thatâs connected to the network called a staking wallet.
Once your staking wallet is set up, and youâve deposited your crypto, a âbonding periodâ sets in, during which the crypto is locked and ineligible for rewards. After this window, youâre securing the network, so the reward distribution begins.
The size of the rewards will depend on the staking rules of the network youâre helping to stake.
For example, some networks give stakers a fixed reward for each block they add to the chain, while others give stakers a share of the transaction fees associated with the block.
Most staking wallets will let you know how much you can expect to earn in rewards, as well as how long it will take to earn them.
Staking FAQ
How much in rewards do IÂ earn?
The amount of rewards you earn depends on how much you stake and the tokenâs specific staking program. Many estimate Ethereumâs rewards at around 5â6% as of a few days before the Merge.
Why canât I stake all crypto IÂ own?
Many cryptosâââsuch as bitcoin, dogecoin, and litecoinâââdonât use proof-of-stake to verify their network, meaning you canât stake them. Those cryptocurrencies get secured through proof-of-work processes like mining.
Which cryptos support staking?
Many cryptocurrencies support staking, such as:
- Ethereumâââmade possible by the Ethereum Merge
- Avalanche
- Solana
- Polkadot
- And more
How are staking rewards taxed?
In most places, staking rewards are taxed as income. Consult an accountant or other financial professional for the specifics of your region.
IMPORTANT NOTE:
The purchase of crypto entails a risk. The value of crypto can fluctuate and capital involved in a crypto transaction is subject to market volatility and loss.
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Staking Explained was originally published in @blockchain on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.