July 12, 2024
By Anjali Kochhar
With the rise of cryptocurrency, investors have explored various ways to maximize their profits. While selling investments when market prices increase remains a popular strategy, other methods like staking offer an appealing alternative. Staking allows investors to put their digital assets to work, earning passive income without the need to sell them.
Staking can be compared to depositing cash in a high-yield savings account. When you deposit money in such an account, the bank lends out your funds and pays you interest in return. Similarly, staking involves locking up your cryptocurrency assets for a certain period to support the operation of a blockchain network. In return, you earn more cryptocurrency as rewards.
Many blockchain networks use a proof of stake (PoS) consensus mechanism. In this system, network participants who want to support the blockchain by validating new transactions and adding new blocks must “stake” a specific amount of cryptocurrency. This staking process helps ensure that only legitimate data and transactions are added to the blockchain.
Proof of stake is a method that blockchain networks use to achieve distributed consensus. In simpler terms, it is a way to ensure that all transactions are verified and secure. Participants, known as validators, lock up a certain amount of cryptocurrency as a stake. This stake acts as a form of insurance: if validators improperly validate flawed or fraudulent data, they may lose some or all of their stake as a penalty. However, if they validate correct, legitimate transactions and data, they earn more crypto as a reward.
Top cryptocurrencies such as Solana (SOL) and Ethereum(ETH) use staking as part of their consensus mechanisms. Staking helps cultivate a functioning ecosystem on these networks. Typically, the bigger the stake, the greater chance validators get to add new blocks and earn rewards. As validators amass larger amounts of stake delegations from multiple holders, this acts as proof to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighted proportionally to the amount of stake the validator has attracted.
A stake doesn’t have to consist of just one person’s tokens. For example, a holder can participate in a staking pool, where stake pool operators do the heavy lifting in validating the transactions on the blockchain. Each blockchain has its set of rules for validators. For instance, Ethereum requires each validator to hold at least 32 ETH, which, at the time of this writing, is about $38,965. A staking pool allows you to collaborate with others and use less than that hefty amount to stake. However, these pools are typically built through third-party solutions.
If you own a cryptocurrency that uses a proof of stake blockchain, you are eligible to stake your tokens. Staking locks up your assets to participate and help maintain the security of that network’s blockchain. In exchange for locking up your assets and participating in the network validation, validators receive rewards in that cryptocurrency known as staking rewards. You can also set up a cryptocurrency wallet that supports staking.
Expert opinions further illustrate the benefits and workings of staking. Mr. Edul Patel, CEO and Co-founder of Mudrex, explains that crypto staking entails holding funds in a crypto wallet to support a blockchain network’s operations, enhancing its security and functionality. Stakers earn rewards for activities like validating transactions, promoting network participation and decentralization. Benefits include passive income, potential token value growth, and a more secure blockchain due to widespread staking.
Rajagopal Menon, Vice President of WazirX, explains, “Staking lets crypto holders earn rewards by enhancing blockchain security and efficiency. Computers, not individuals, use staked tokens to validate transactions. Exchanges often offer this service, where tokens are locked for a period. Validators earn transaction fees or new crypto, which is shared with users who staked their crypto through exchanges.”
However, the staked crypto is inaccessible for a set period, during which it cannot be traded. The value of staked crypto can fluctuate similarly to token prices. But staking enables one to experience being part of a blockchain system and earn passive rewards.
Vitalik Buterin, Co-founder of Ethereum says “Crypto staking plays a crucial role in enhancing blockchain security and decentralisation”.It incentivizes stakeholders to actively participate in network operations, contributing to its stability and growth. As the ecosystem matures, staking not only provides a passive income opportunity but also strengthens the integrity of blockchain networks worldwide.
In conclusion, staking is a compelling option for cryptocurrency investors looking to earn passive income while supporting the integrity and security of blockchain networks. By locking up assets and participating in network validation, investors can earn staking rewards and potentially see their staked tokens appreciate in value. As the cryptocurrency landscape continues to evolve, staking remains a significant and beneficial practice for those involved in the ecosystem.
About the author
Anjali Kochhar covers cryptocurrency stories in India as well as globally. Having been in the field of media and journalism for over three years now, she has developed a sharp news sense and works hard to present information that goes beyond the obvious. She is an avid reader and loves writing on a wide range of subjects.
