I want to explain to you simply what cryptocurrency staking is.
I made a bunch of videos in the past where I showed you how to stake Tezos, Polkadot, or the Crypto.com token – CRO.
All this, in the attempt of earning passive income with these investments.
But what actually happens when you stake cryptocurrencies and why you should do it?
Staking your cryptocurrency is a lot like earning interest on your deposits in a bank account.
Your crypto can be staked, or locked inside the network, in exchange for the chance to produce a block, which in turn, you would receive a reward for. This is called Proof of Stake.
Staking is the process of holding funds in a cryptocurrency wallet to support the operations of a blockchain network. This is where the rewards come from.
This is different than Proof of Work, which the Bitcoin network is using. Proof of Work requires powerful computers to produce a block in the blockchain. With Proof of Stake, anyone can participate, no matter how big or small your investment is.
But not all tokens use Proof of Stake to operate their blockchain. Some of the most popular proof of stake cryptocurrencies are Tezos, Cosmos, and Cardano.
You can however earn interest on your cryptocurrencies, even if they don’t have native Proof of Stake.
This is possible because traders and institutions are interested in borrowing these assets. Therefore there are companies that will pay you interest if you lend them your coins. This is a more accurate example of earning interest with a bank analogy that I made earlier.
Some companies, like Crypto.com for example, require you to lock up your funds for a certain period; like 1, 3, or 6 months to receive higher interest on your deposits. This means you won’t be able to access your funds during this period, but you’ll receive interest paid weekly.
Other companies like Celsius Network or BlockFi don’t require a lock-up period and you can deposit and withdraw at any time.
Lending your crypto to these companies it’s usually the easiest way to earn passive income. You just transfer your funds in their wallets and you start earning. Participating in Proof of Stake can involve a bit more steps and can be a bit technical. It’s not that complicated though. You can check my guide on how to stake Tezos for example, to see for yourself.
There are pros and cons to both methods.
When you send your funds to a lending company or a crypto exchange, you put 100% of your trust and faith in that company. They are now in charge of your funds and you hope they will keep them safe. You hope they will not get hacked, lose your funds or that they will pay you back. Since the cryptocurrency market is still mostly not regulated, there’s a lot of risks.
That being said, these companies offer the highest rates, far greater than what any bank will offer you. For example, on Celsius Network you can earn 11.55% on your cash. If you convert your cash to stablecoins that is. Stablecoins are a group of cryptocurrencies that are pegged 1:1 to the major currencies we use every day, like USD, EUR, or GBP. 100 USDC equals 100 USD and 100 TrueGBP equals 100 GBP.
So with these companies you take on a higher risk to earn a bit more.
When it comes to Proof of Stake, this should be a much safer option, if you know what you are doing.
When you stake your token, they will be set to a locked state. During this time, the tokens cannot be moved or traded. This is true in most cases, like with Tron and Cosmos. For other projects, you are not required to lock your tokens, Tezos, or VeChain for example, but you’ll stop receiving rewards when you move your funds.
If you have a large investment in any of these assets, you can do the staking by yourself. But usually, that’s very costly, you need 8000 XTZ to be a Tezos Baker which is today valued at over $17,000. However, many people put their funds together to reach this minimum requirement so you can contribute even with 1 XTZ. So your task is to choose and delegate your coins to one validator which gathers the coins from all the people who want to contribute.
If you don’t pick a good validator, then you might not receive your rewards for staking. However, that’s not as hard as it sounds. Again, check my guide on how to stake Tezos on a hardware wallet and you’ll see what I mean.
Also, it’s important what coin and network you choose for staking. Some start paying rewards instantly, others release the rewards after a period.
Another thing to keep in mind is that the behavior of the market is something that we cannot control. The price may go up and go down in a matter of seconds. If your tokens are locked, there is nothing that you can do but watch the direction of the market. But if you plan to hold cryptocurrency for some time by staking you will accumulate even more.