Staking is a method of putting your digital assets to work without needing to trade or sell them.
It’s a popular concept in the world of cryptocurrency because it lets you earn yields on your assets with little risk beyond price volatility inherent in your original investment.
By “staking” your cryptocurrency you can earn “passive income” on your investments without doing anything.
When a traditional bank gives you interest, it’s because you’re effectively lending them your money to put to use elsewhere and receive a cut of the profits. With staking, instead of a bank taking your money, your digital assets are used to maintain blockchain security.
These percentages are usually much higher than the interest rates offered by most banks – and the more crypto you stake, the better your yield will be.
Check the Nash app here. It’s an incredibly user-friendly app that’ll help you get on the crypto ladder in the way that suits you best.
How does staking work?
To understand staking, you need to understand proof-of-stake blockchains.
The simple thing to note here is this: every transaction on a blockchain requires new blocks to be made in order to be verified.
These new blocks are produced and validated by “stakers” – also known as “validators” – and they are randomly chosen to stop the blockchain from being rigged.
A validator is chosen at random by the blockchain to check the block. If everything’s fine, the block gets validated and reviewed by a number of other validators until it is “confirmed”. Once confirmed, the validators then receive their block reward.
Sounds nice, right?
Well, in order to be a validator and collect those block rewards, you need to put your money where your mouth is. You need to “stake” a certain amount of crypto in order to have the opportunity to validate blocks. If you don’t validate them properly – if the other validators checking the chain don’t agree with you – then you can lose all your staked funds.
Staking means that there’s a huge financial incentive to validate blocks and keep the chain running properly – and a huge financial disincentive to try to fake or reverse transactions. Unless you control a huge amount of the currency supply of a chain, you won’t be able to guarantee that you can get a fake transaction approved.
So staking keeps a chain secure because it becomes too expensive to try to control multiple validators and expect them to coordinate.
Although running a validator node can cost a lot of cryptocurrency, there are staking pools where people owning smaller amounts can club together.
Which cryptocurrencies can you stake?
As we mentioned earlier, staking only works on cryptocurrencies that use a “proof-of-stake” blockchain. For instance, Bitcoin, the most popular crypto asset, uses a proof-of-work blockchain and therefore staking cannot be done.
Prominent cryptocurrencies you can stake include:
Ethereum 2.0 (ETH)
All of these cryptocurrencies are available on the Nash app.
What are the benefits of staking cryptocurrency?
If you are a long-term investor who is interested in making some money on your digital assets without the risks of trading, staking could be for you.
The rewards you receive from staking are much better than those associated with interest from high-street banks.
It’s important to note that rewards do differ depending on the staking pool used and the blockchain. The best ones are the ones with low commission fees who tend to validate more blocks than others.
Is staking cryptocurrency safe?
Staking is viewed as a safe technology. However, as with all types of investing – and especially when it comes to crypto – there are inherent risks that you should be considering:
- Cryptocurrencies can be volatile and a sharp fall in value of your asset can outweigh the yields you earn from staking. You should think of staking as part of a long-term crypto strategy, not as a means for short-term gains.
- Some cryptocurrencies require that the coins you stake are locked for a certain period, meaning you cannot withdraw or trade them.
- If you are allowed to withdraw your coins from the staking pool, sometimes there can be cumbersome waiting periods.
- Though it’s incredibly rare, staking pools can be hacked and there’s little chance of compensation if you lose your coins.