What is staking crypto” and how does it work?

You may have noticed Ethereum and many other altcoins have adopted something called proof of stake. Here we unpack how it all works.

If you’ve been following crypto, you might have heard about staking. Whether in relation to Ethereums upgrade (Ethereum 2.0) or across smaller coins that make staking a big part of their set up – eg Cosmos, Cardano, Polkadot and Solana – its fast becoming a more mainstream aspect of #cryptolife™.

Yeah, so what is crypto staking then?

Staking is sort of an evolution of bitcoin mining, the process that makes bitcoin’s blockchain work. Mining is a mechanism known as Proof of Work (PoW) where the quickest computer to complete the task (such as processing a translation or adding data to the blockchain) gets rewarded in crypto. This means every computer on the network is constantly scrambling to try and complete things first, which uses a lot of energy.

Staking uses a system called Proof of Stake (PoS). This works by the blockchain randomly assigning a computer to carry out the task at hand. To stake, you put aside part of your holdings of the blockchain’s native coin (your ether for Ethereums blockchain, for example) and the amount you stake gives you a probability of being assigned the task.

The more you stake, the higher the chances you’ll be doing the task (processing transactions, validating information and more). When you complete the task, as with mining, you’re rewarded. But you can also earn interest for staking generally on some blockchains.

So it’s fairer. It’s also better for the planet because everyone isn’t scrambling to be first, so way less energy is used up. That’s why people think Ethereum could overtake bitcoin one day.

Not everyone who owns crypto on PoS blockchains takes part in that proof of stake. But they can, and there are rewards for it.

What does staking involve?

When you stake crypto, you offer up part of your wallet to the blockchain, like collateral. This means the fraction of your wallet you’ve staked is locked up for a certain period of time. You can unstake it, and it’s still your money, but sometimes this can’t be done immediately.

Also, with some blockchain, you’ll need a minimum amount of the native coin to begin staking. For example, Ethereum requires you to have a minimum of 32 ETH to get involved. That’s roughly £110,000 at the time of writing. Others are more accessible, though. Cardanos minimum is one ADA (that’s the name of Cardano’s cryptocoin), which is around £1.50 at the time of writing.

In terms of what it involves on your part, there’s usually not much to it, actually. It’s all pretty passive – you don’t manually do much aside from setting up how much of your crypto you want to stake.

For example: to stake Solana on the wallet Exodus, you simply tap a couple buttons and you’re good to go. It’ll take a good few days to start earning rewards and it takes a few days to unstake. If you want to unstake, you’ll have to unstake the entire amount you staked in the first place. This then goes back into your holdings (your balance).

What are the rewards?

There are plenty. Firstly, as noted above, it’s better for the planet than mining crypto – only one computer is expending the energy to complete the task needed, instead of everyone trying to be the first to do it. Also, you can earn crypto or tokens (depending on what you’re staking) from it. These can be as a payment for completing tasks, or simply as part of their interest scheme – some offer a percentage of interest per year, paid in that token on coin you have staked.

Staking is also good for the blockchain, as the more people doing it, the quicker the blockchain becomes. This can be good for you if you hold the native coin of that particular blockchain (e.g. the cryptocoin ether for Ethereum’s blockchain) as the price will more likely climb. With some blockchains, staking also means you get voting rights on decisions about the blockchain’s updates and future, like you do when you invest in certain companies.

Are there any risks?

Of course, crypto is loaded with risks and many of those apply to staking too. For starters, crypto prices are super volatile, so if you’ve put money away and can’t access it for a few months, but the value of the coin plummets, you can’t cash out. Also, specifically within staking there can be fines for misconduct.

This is called slashing, and is when a blockchain will burn a proportion of its stake (the pool your staked crypto goes into) if people attempt to break rules. Guilty computers can also be removed entirely. Sometimes a bug can cause this to happen, as can honest mistakes from computers.

Will it be better than bitcoin?

Proof of Stake is far better for the environment, and allows more scalability than bitcoin (as seen with the far speedier transaction times), but that doesn’t necessarily mean it’ll catch on. Bitcoin is pretty massive, and entire countries like El Salvador are using it. So the sentiment could well become why change?” and therefore, the other coins will fade where bitcoin increases. So there’s never a guarantee of anything going the way you want it to.

Will staking crypto make me minted?

Not really, not on its own at least, but it’ll add to whatever you already have – a little like interest does, only a better percentage than you’re likely getting at your bank. Cardano currently gets around five per cent interest per year, which is a fair bit better than the Bank of England’s interest rate at the moment, which is 0.1 per cent (10p for every £100, versus a fiver).

They can also be more generous than that. On Exodus, cosmos (the coin is known as ATOM) has an average reward rate” of 10.32 per cent. Of course you can earn more by being selected to complete tasks, which will boost the income, but generally this is a good passive income option.

Also, there are fees for staking which vary from one blockchain to the next. Generally they’re less than five per cent and are taken as a percentage of your rewards, so it’s not too shabby.

Could anything else overtake it?

Well, there is something called Proof of History, which you can argue is the latest in a line of proof of” systems. Solana is the leading blockchain using this, and its native coin (Solana) is doing pretty well at the moment. According to Coinbase, it’s climbed 56 per cent over the last month, at the time of writing. That’s pretty huge.

But big gains don’t mean it’ll take over the likes of Ethereum and bitcoin. Neither is there really a way of proving Proof of History is why Solana is doing well, but it sure can be an indicator – eagle eyes will have noticed at the start of this column that you can stake Solana. Proof of History uses timestamps so that everyone knows what’s going on, just quicker and with less energy. It still needs regulating, though, hence the staking.

In conclusion: there’s no guarantees in the world of crypto that staking can help to boost the amount of a crypto coin or token you have with relatively little work. Some wallets like Exodus make it as easy as clicking a few buttons, for instance. However, there is always a risk of losing your stake due to errors, or by not being able to sell that portion of your crypto if the value plummets suddenly, as it’s locked up.

As always, do some research before jumping on the wagon. Staking is not for everyone, so be careful out there.

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