Explained: How to stake your cryptos and what are the benefits

The easiest way to understand crypto staking is to compare it with your savings bank account. When you deposit money into a savings account, the bank pays you interest as a reward. That’s precisely what crypto staking does too. The only difference is the nature of commitment. In the case of bank deposits, the bank uses your money for its operations, earning profits in the process. However, in crypto staking, you pledge your cryptocurrency to the development of the blockchain network.

Crypto staking is a great way to establish a passive revenue stream. This is because the interest rates offered on staked crypto are quite attractive. According to The Motley Fool, it is possible to earn anywhere between 10-20 percent annually from crypto staking. Blockchains that currently support staking are Cardano, Solana, Algorand, Tezos, Cosmos, and Ethereum 2.0, to name a few.

How does crypto staking work?

There is no central authority to verify and maintain transactional data in a blockchain. Instead, the job is done using a consensus mechanism. This means that a network of computers on the blockchain works together to verify transactional data and add it to the chain.

For instance, Bitcoin uses the Proof of Work (PoW) consensus mechanism. It requires users to dedicate an immense amount of computational power to process transactions and add them to the ledger. However, the PoW consensus mechanism has a substantial carbon footprint, thanks to all the computational power it requires.

The Proof of Stake (PoS) consensus mechanism offers an environmentally friendly alternative to the energy-sapping PoW consensus mechanism. Instead of dedicating their computational power, users pledge their cryptocurrencies to qualify as validators, better known as nodes. The more crypto you stake, the higher the chances of becoming a node.

Nodes continuously verify transaction data. The processed data from numerous nodes is then clubbed into a ‘block’ and added to the blockchain. The blockchain mints tokens every time a new block is generated and rewards these tokens to the nodes. This entire process of devoting cryptocurrency, contributing to blockchain processing, and earning rewards is called staking.

When you stake cryptocurrency, you are still the owner of the assets. They just remain locked until you choose to un-stake them and retrieve the crypto. In most cases, the un-staking process is not immediate and takes time. Some blockchains also require one to pledge the cryptocurrency for a minimum amount of time before it can be un-staked.

Also, it is important to note that the network may require you to commit a certain amount of crypto to join the staking pool. On the Ethereum network, for example, you will need 32 Ether (ETH) to become a full validator or some ETH to join a staking pool. Currently, one ether is trading at roughly Rs 186,000 on WazirX.

How do you start staking your cryptocurrency?

From an end user’s perspective, staking can be a confusing process. But we’ll simplify that for you. Here is a step-by-step guide to crypto staking:

Buy cryptocurrency that can be staked:

As mentioned earlier, not all blockchains allow crypto staking. You need to look for those that use PoS as their consensus mechanism. Some of the best-known ones are:

  • Ethereum (ETH)
  • Cardano (ADA)
  • Solana (SOL)
  • Tezos (XTZ)
  • Polkadot (DOT)
  • Cosmos (ATOM)
  • The purchase can be made from any crypto exchange like CoinDCX, WazirX, or CoinSwitch Kuber.

    Move the purchased crypto to a blockchain wallet (Optional):

    When you buy cryptocurrency on the exchange, it is held by the exchange and not in a blockchain wallet. Many crypto exchanges have their own staking programs, which may allow you to stake your crypto assets directly from there. In this case, you need not worry about creating a blockchain wallet at all.

    However, if that option is not available, you will need to create a crypto wallet. Wallets are the easiest way to store your cryptocurrency without hassles. Upon wallet creation, you need to navigate to the option that allows you to deposit cryptocurrency into your wallet – this step generates a wallet address.

    You can now go to the exchange website, choose to withdraw your purchased cryptocurrency, and input the wallet address in which you want to hold your assets. Your crypto will get transferred to your wallet.

    Staking Pool:

    Staking pools can be thought of as a car-pooling service. Instead of going alone, multiple crypto traders combine their crypto and stake the entire pool. The size of the staked crypto assets improves their chances of earning rewards. Staking pools are easily identifiable and can be researched on the internet.

    Here are a few things you should watch for when choosing a staking pool:

    Pool Size – Smaller pools are seldom picked for staking but, if chosen, offer sizeable rewards. Larger pools get selected quickly, but the rewards are divided amongst more contributors. Therefore, mid-sized pools are ideal.

    Staking Fee – most pools charge a small percentage of the staking rewards as fees for being a facilitator. Make sure you aren’t paying too much.

    Consistency – pick a pool with less downtime as rewards aren’t earned when servers are dysfunctional.

    Once you have identified the right pool, you can stake cryptocurrency straight from your wallet itself. You can also stake your crypto as an individual if you have a large amount of crypto at your disposal.

    Advantages of staking crypto:

  • The reward percentage is significantly higher than other forms of investment. As mentioned earlier, it is possible to make 10-20 percent returns yearly.
  • It is the simplest way to deploy your idle crypto holdings and establish a passive income.
  • Staking contributes to the security of the blockchain as you become a node that validates transaction data.
  • Most importantly – staking is much more eco-friendly than mining.

  • Read More: Explained: How to stake your cryptos and what are the benefits

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