Staking means dedicating your cryptocurrencies to a blockchain network for a certain period of time. By staking, you can earn rewards on the crypto you have staked. By doing so, you can earn compound interest on your cryptocurrencies by as much as 20%.
Don't worry though, staking does not mean you will lose ownership over your staked crypto. After the minimum withdrawal time is over, you can unstake your crypto if you wish and regain full possession of your crypto.
How Does Staking Work?
The first and the most well-known cryptocurrency: Bitcoin, uses the PoW (proof-of-work) mechanism to guarantee that each network participant has performed a certain amount of work to receive a reward.
PoS or proof-of-stake is a much newer and less energy-intensive mechanism that many cryptocurrencies use. Proof of Stake compels participants to prove that they are prepared to secure the integrity of the blockchain by locking or staking their crypto as proof of their authentic participation in the network.
Participants thus "stake" a certain amount of crypto to assist the network in verifying blockchain transactions and earn staking rewards in exchange. This may look complicated; however, it is as easy as entering the amount you want to stake and then clicking a button for the average user.
Staking Rewards and Duration
The duration for which your crypto will be locked, and the amount of rewards you will earn for staking, depends solely on the cryptocurrency you choose. There are currently many proof-of-stake cryptocurrencies where you can stake your crypto. Each cryptocurrency has its advantages and disadvantages, and the rewards can vary.
Which Cryptocurrency Should I Choose To Stake?
The coin you choose to stake in is solely up to you as they each have their own advantages that make them different. However, it is important to know the different factors before choosing one. Some of the factors you may want to consider include:
- The interest you will earn from staking.
- The amount of time required to stake your crypto.
- How secure is the network?
- The amount of coin you have.
- Your level of risk tolerance.
Advantages of Staking
If you are wondering why you should stake your crypto, then you should know that staking offers a lot of benefits. Some of these benefits include:
Staking is a great way to earn high interest on your crypto or savings. This is especially when the interest rates banks are willing to give on deposit accounts are now often lower than the inflation rates of many countries.
Staking crypto is an excellent way to generate passive income.
Hedge Against Inflation
Staking can be used as a hedge against inflation. By putting your dormant savings in a staking pool, it can generate passive income as well as act as a hedge against rampant inflation.
Staking also lets people access higher interest rates while leaving a lesser impact on the environment. Unlike energy-intensive Proof-of-Work, Proof-of-Stake is an ecologically friendly security mechanism for the blockchain.
Disadvantages of Staking
While staking does offer a lot of benefits, it is not without its own share of downsides. Some of these disadvantages include:
The Cryptocurrency market is still a long way from being mainstream, and due to this, the market is still relatively volatile and risky. Although staking has considerably higher interest rates than banks, it comes at the cost of greater risk.
Some staking options require you to lock up your crypto for some time before you can re-possess them. Unfortunately, you cannot access your crypto during this lock-up period or might have to pay a fee to do so.
If you are staking on an exchange, you will have to pay additional fees for the exchange to stake your coins.
Staking is one of the easiest ways to make significant passive income from dormant capital due to cryptocurrencies' exceptional interest rates. If you want to avoid inflation while making passive income, you should unquestionably take advantage of staking.