What is Crypto Staking? Understanding How to Earn and Manage Risks

What is crypto staking

Cryptocurrency staking is a popular way to make money, where you blockchain your tokens and receive income in the form of additional tokens during the blockchain. Typically, the coins sent for staking maintain the blockchain and keep the network secure. 

Staking is often used by investors who hold assets for a long time and want to receive additional income for the time they hold the assets.

How does crypto staking work

Staking is based on the Proof of Stake (PoS) mechanism and allows network participants (validators) to validate the transactions of other network users and create new blocks based on the tokens they have blocked. The predecessor of the PoS mechanism was the Proof of Work (PoW) mechanism. This was a less energy efficient and more complex mechanism where validators (also known as miners) required more computing power to operate. 

Choosing the Right Cryptocurrency to Stake

A huge number of cryptocurrencies are available for staking. These include the largest, Bitcoin, Ethereum and BNB, as well as coins with small capitalization or recently launched tokens. The choice of tokens for staking depends on the profitability and prospects of the coin itself if you plan to hold it for the long term. Most coins have no minimum and maximum amounts for staking, and you can stake almost any amount you want. However, some coins may have restrictions. In addition, you should consider the liquidity of the coin you choose and the terms and conditions of blocking funds. There are staking where you can lock your tokens for 30, 60, or 120 days, for example, with no way to remove them before the lock expires. There are also more flexible staking that allow you to deposit or withdraw your funds without any restrictions.

Step-by-Step Guide to Staking Your Crypto

APY and APR: what’s the difference?

As a rule, the yield of staked coins is calculated at an annual percentage rate. On the sites you will see the terms APY or APR. Both show the annual percentage rate. The only difference between the two is that the APY takes into account the compound interest you will receive if you reinvest your profits, while the APR is calculated without compound interest. 

Where to Stake Your Crypto

Opportunities for cryptocurrency staking are offered by the largest centralized exchanges such as Binance, Coinbase and others, as well as decentralized solutions such as Beefy. The market offers solutions for beginners with a stable annual interest rate as well as more flexible terms with an unstable interest rate but higher returns.

Coinbase allows you to start staking with as little as $1, and Binance has many options for staking with flexible payouts. You should compare all the platforms where you can stake your capital and choose the best terms that suit you.

Platforms and Tools for Staking

There are many types of staking. It can be traditional staking, liquid staking or pool staking. Of all these types, liquid staking is the most flexible option for investors as it allows you to keep your assets liquid even if they are blocked for staking. This allows you to use the staked coins in other DeFi projects. 

For example, you can use the Lido or Rocket Pool platforms for Ethereum liquid staking, the Marinade project for Solana and the Ton Whales project for TON. Such projects exist for most major blockchains and offer the same way of working: you stake your coins, e.g. SOL (Solana blockchain coin), get a wrapped mSOL token in return, which in turn can be used in other DeFi applications on Solana.

How to stake your crypto

When you have decided on the selected coin and platform for staking, you should transfer your coins to the platform on which you are going to stake the coins. On the staking page you should select the required number of coins and click the Stake button to send the coins to the staking platform.

Potential Earnings and Risks of Staking

How Much Can You Earn by Staking Crypto?

It is important to understand the rule of thumb that the larger a coin is in terms of capitalization, the less interest is offered on it. Conversely, coins with small capitalization will be more profitable in terms of staking, but due to their higher volatility, you will be exposed to increased risk.

The same goes for marketplaces. Smaller marketplaces will offer higher interest rates compared to larger staking platforms such as Binance or Coinbase. 

Returns will also depend on market conditions. As a rule of thumb, the fewer investors who stake a coin in a selected pool, the higher the return. As the number of investors increases, the rate of return will decrease.

Now let’s take a practical look at how much you can earn by staking a particular coin. For example, the yield of large coins, such as Ethereum, will be 3% on Coinbase and up to 7% on Ledger. The yield of a small capitalization coin ENA will be 7.5% on Binance, and on the smaller site Pendle can reach up to 61%. You can also stake your stablecoins and earn additional income from them. For example, USDC stablecoin on Binance can be staked at 2.05%, and on Kraken platform up to 5% per annum.

Thus, the profitability of staking depends on such factors as the chosen coin, platform, market conditions and, in some cases, the platform’s commission and possible changes in the network that may affect your income.

What are the Risks of Staking Crypto?

Can You Lose Money by Staking?

With staking, the probability of losing your money is non zero. There are a number of risks, such as a decrease in the value of the tokens you are staking, technical failures in the blockchain, or hackers breaking into the smart contracts that hold the staked coins. In addition, there is the risk of slashing, which is when the platform takes away a portion of the validator’s tokens for violating the network’s rules. This penalizes unscrupulous validators.

Is Crypto Staking Safe?

Compared to other ways to make money in crypto, such as loans or liquid pools, crypto staking is one of the safest investments. 

Choose only trustworthy and reliable platforms for staking your assets, and carefully study the detailed information about staking and unlocking details that each platform sets independently.

Is Crypto Staking Worth It?

Evaluating the Pros and Cons

Staking is still a relatively easy way to make money, where the pros in terms of additional profitability far outweigh the cons in terms of possible risks and temporary blocking of tokens. It is important to strike a balance and choose a platform with minimal risks and maximum rewards. Also keep in mind that not all coins are suitable for staking. Some projects simply do not allow it.

Long-Term Considerations for Staking

When investing for the long term, it is important to keep in mind the growth potential of the selected coin, so that you do not get into a situation where you get a 30% annualized return for one year, but in the same period the coin has lost 80% of its value. It is important to choose coins whose growth you believe in over the long term. 

Also, when staking for the long term, you should keep track of the changing annual interest rate so that asset staking continues to meet your return expectations. Keep an eye on technology and changes in the network so that you can adjust your staking strategy in time and not miss out on the better deals that will appear in the market from time to time.

Keep in mind that the cryptocurrency market is dynamic. New promising coins for staking emerge, platforms offer profitable investment solutions, and finally, new tools appear that allow you to earn by owning assets. All these factors will influence your choice in favor of staking and increase or decrease the number of staked coins.

Conclusion

In 2024, staking remains a lucrative endeavor despite many other ways to make money. It offers long-term investors great solutions for extra income. It is much better than keeping your coins in a cold wallet. After all, you are missing out on additional profits that you could be making with just a few keystrokes. 

However, it is important to keep in mind the pitfalls that can occur in staking. It is necessary to carefully approach the choice of the site and the possible volatility of the chosen coin, to study in detail the offer and possible blocking of assets. Following our recommendations will help you manage your assets more effectively and reduce possible risks. 

Be ready to adapt your staking strategy to changing market conditions and technological changes, so that you can continue to profitably stake your coins.

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