One way to make a profit from cryptocurrencies is to sell your investment when the market price rises. However, crypto also offers alternative income-generating methods, such as staking. Crypto Staking allows you to put your digital assets to work and earn passive revenue without having to sell them.
Staking shares similarities with depositing funds into a high-yield savings account. Banks utilize your deposits for lending purposes, and you receive interest on your account balance. In theory, staking is similar to the bank deposit mechanism, however, the resemblance is limited. Here's all you need to know about crypto staking.
Crypto Staking Explained
Staking involves individuals locking their cryptocurrency, referred to as their “stake,” to actively support the security and functionality of a blockchain network. When individuals engage in staking, they effectively contribute to securing the blockchain and verifying transactions within it.
Staking is a feature exclusive to blockchain platforms like Ethereum and Cardano, which operate on a proof-of-stake (PoS) consensus mechanism. This stands in contrast to cryptocurrencies like Bitcoin, which rely on proof-of-work (PoW) where miners employ computational power to validate transactions.
Staking coins reduces the liquidity of users’ holdings because these coins become tied up in the staking process. Generally, individuals can still access their staked coins, but they may only regain the ability to use them for other purposes once they are no longer staked.
Proof of Stake (PoS) Consensus Mechanism
The PoS algorithm employs a pseudo-random selection method for choosing validators from a pool of nodes. This approach incorporates several factors like stake age, randomness, and node wealth. However, each PoS cryptocurrency has its unique set of rules and strategies aimed at creating what it deems the optimal network configuration for its users.
PoS offers the ability to generate blocks without depending on specialized mining hardware like ASICs. While ASIC mining involves a substantial investment in hardware and energy for mining operations, staking involves an investment in the cryptocurrency itself.
In PoS, blocks are crafted rather than mined. When a node is chosen to craft the next block, it verifies the block's transactions for validity, signs the block, and appends it to the blockchain. In return, the node receives transaction fees from the block and, on certain blockchains, a coin reward.
If a node wishes to cease being a block forger, its stake and earned rewards are released after a specified period. This gives the network time to confirm that no fraudulent blocks have been added to the blockchain by the node.
Some argue that block production through staking enhances blockchain scalability. This is one of the rationales behind the Ethereum network's transition from PoW to PoS, implemented through a series of technical upgrades collectively known as ETH 2.0.
How Crypto Staking Works?
Each Proof of Stake (PoS) blockchain network utilizes a distinct staking currency for active involvement in the staking process, typically represented by the native currency of the respective blockchain network.
For instance, if a PoS blockchain operates on the Ethereum platform, the staking currency would be ether. Similarly, when a new PoS blockchain network is introduced, it often introduces a novel cryptocurrency as the staking currency for that particular network. Consequently, individuals interested in participating in this network must obtain the designated staking currency.
There exist several methods for staking cryptocurrencies, with the choice depending on an investor's technical proficiency, the quantity of cryptocurrency they intend to stake, and their preferred level of control.
One viable approach is to establish and maintain a validator node on the blockchain, a method demanding technical expertise and offering the highest level of control over the staking process, albeit also entailing the most responsibility and potential risks.
Another option entails utilizing staking-as-a-service platforms, enabling users to delegate their stake to a third-party service provider responsible for operating a validator node. This approach strikes a balance between control and convenience, permitting users to maintain control over their funds while entrusting the operational aspects to a reliable service provider. Further details regarding pooled staking will be explored later.
Lastly, several cryptocurrency exchanges, like SunCrypto, extend crypto staking services to their users, affording them the opportunity to stake their cryptocurrency without needing to operate their own node or delegate to a third-party service provider. Although this method offers the utmost convenience, users must exercise caution and thoroughly evaluate the exchange's security measures prior to staking their cryptocurrency on the platform.
What Is a Staking Pool?
A staking pool refers to a collective assembly of cryptocurrency holders who combine their coins to enhance their chances of being selected as validators. This collaborative effort increases the likelihood of earning staking rewards, which are distributed in accordance with each member's contribution to the pool.
Staking pools prove advantageous for individual users who lack the necessary resources or technical know-how to manage their own validator nodes. Instead, they can delegate their staking authority to a pool, thus gaining rewards without the need to operate a node themselves.
Moreover, staking pools can prove beneficial to smaller investors who possess an insufficient coin quantity to meet the minimum staking requirements. By pooling their assets alongside other users, they can meet these prerequisites and commence earning rewards.
However, it is vital to bear in mind that staking pools typically levy a fee for their services, deducted from the staking rewards. Additionally, users must exercise caution and select a reputable staking pool with a well-established history of performance and security.
What Are the Advantages of Staking Cryptocurrency?
▪️ Generating Staking Rewards: Nodes involved in the validation process of a network receive rewards in the form of cryptocurrency or transaction fees, thereby enabling users to earn passive income. Staking also enhances liquidity by allowing users to deploy their dormant holdings without the need to sell them.
▪️ Reinforcing Network Security: Crypto Staking contributes to network security by incentivizing validators to act in the network's best interests. Validators who engage in malicious activities or breach network rules risk having their staked assets confiscated, thus deterring malevolent entities from attempting to undermine the network.
▪️ Promoting Decentralization: Staking aids in decentralizing the network by enabling anyone to participate in the validation process. This decentralization mitigates the risk of a single entity gaining excessive control over the network, which could jeopardize its security.
▪️ Energy Efficiency: Staking is regarded as a more energy-efficient and eco-friendly alternative to Proof of Work (PoW) mining, as it demands significantly less computational power to validate transactions and create new blocks.
▪️ Network Governance: Certain blockchain networks grant users who stake their cryptocurrency the privilege of voting and influencing network governance. This empowerment gives stakeholders a voice in proposing and determining protocol upgrades, alterations, and enhancements, allowing them to shape the network's future trajectory.
What Are the Perils of Staking Cryptocurrency?
Validators must conduct thorough research on the specific cryptocurrency they intend to stake, comprehend the associated risks, and possess a clear understanding of the technical prerequisites and procedures involved in staking. Here are some of the risks associated with cryptocurrency staking:
▪️ Volatility Risk: Cryptocurrency values are susceptible to rapid fluctuations, which means that the worth of the staked cryptocurrency can plummet swiftly, potentially resulting in substantial losses.
▪️ Slashing Risk: In Proof of Stake (PoS) networks, validators may face penalties for various behaviors that contravene network regulations, such as double-signing or prolonged offline periods. These penalties can lead to the forfeiture of some or all of the staked coins.
▪️ Centralization Risk: In certain PoS networks, a small group of validators may control a significant portion of the staked coins. This situation can trigger centralization concerns, as these validators might wield disproportionate influence over the network.
▪️ Technical Risk: Staking necessitates the locking of coins in a wallet or validator node for an extended duration. Technical glitches, such as software bugs, can result in the loss of staked assets.
▪️ Lock-Up Periods: When staking cryptocurrency, users typically need to immobilize their coins for a predetermined period. This may limit immediate access to these assets, preventing users from selling their holdings as swiftly as they would typically do, potentially leading to missed investment opportunities or an inability to respond promptly to price fluctuations.
How Staking Rewards Are Computed?
The calculation of crypto staking rewards varies across different blockchain networks, with some employing a block-by-block adjustment mechanism that takes numerous factors into account. While there is no succinct formula, the reward computation typically encompasses the following factors:
▪️ The quantity of coins staked by the validator.
▪️ The duration for which the validator has actively engaged in staking.
▪️ The validator's ability to fulfill their staking responsibilities.
▪️ The total volume of coins staked on the network.
▪️ The transaction fees within the network.
▪️ The inflation rate of the native coin.
In certain networks, crypto staking rewards are determined as a fixed percentage and are disbursed to validators as compensation for inflation. This inflation-based approach encourages users to utilize their coins rather than hoard them, potentially boosting their adoption as a cryptocurrency. In this model, validators can precisely calculate the staking rewards they can anticipate.
To some participants, a foreseeable reward schedule may appear more appealing than a probabilistic chance of receiving a block reward. Furthermore, since this information is publicly available, it may serve as an incentive for more individuals to participate in staking.
Now let’s have a look at how you can stake cryptocurrencies on SunCryto’s mobile application.
How to Stake Crypto on the SunCrypto App?
SunCrypto, India's leading cryptocurrency exchange, offers staking services for a diverse range of 15 cryptocurrencies, including Tron (TRX), Solana (SOL), Binance Coin (BNB), Core DAO (CORE), Polygon (MATIC), BitTorrent (BTT), Terra Classic (LUNC), Terra (LUNA), ApeCoin (APE), Axie Infinity (AXS), Smooth Love Potion (SLP), Zilliqa (ZIL), Internet Computer (ICP), SafePal (SFP), and Polkadot (DOT).
Now, let's delve into the process of staking these cryptocurrencies using the SunCrypto mobile application. To begin, launch the SunCrypto mobile app and navigate to the staking feature. Once you've entered the staking section, you'll encounter the list of 15 eligible cryptocurrencies for staking. Simply pick the one you'd like to stake.
For instance, if you decide to stake TRON (TRX) tokens, select the quantity of TRX tokens you wish to stake and choose the desired staking duration. Next, locate and tap the “Swipe to Earn” option at the bottom of the screen. After performing this action, you'll receive a confirmation message indicating that your tokens have been successfully staked.
To monitor your earnings from the staked cryptocurrency, visit the "Your Earnings" page within the Crypto Staking section. This straightforward process allows you to stake your cryptocurrencies on the SunCrypto mobile app in just four simple steps.
Conclusion
Engaging in crypto staking presents additional opportunities for individuals interested in contributing to blockchain maintenance and governance. It also provides a convenient means of generating rewards through the act of holding digital assets. The accessibility of the blockchain ecosystem is on the rise as staking procedures become more user-friendly.
However, it's essential to recognize that staking carries inherent risks. Smart contracts employed to secure funds may be susceptible to vulnerabilities, underscoring the importance of conducting thorough research and employing highly secure wallets to safeguard your investments.
To know more about Crypto Staking, go check out SunCrypto Academy.
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