Staking Crypto: What is Coin Staking and How Does It Work?

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If you’ve been keeping up with crypto or just watching your evening news, you’ve probably heard about crypto staking.

Coin staking is how many cryptocurrencies verify their transactions, and it allows participants to earn rewards on their holdings. Staking helps keep the blockchain secure while allowing crypto holders to make a little extra money on the side.

Staking can be a great way to use your crypto to generate passive income.

What is Coin Staking?

Staking is a form of transaction verification in which users commit their assets to support a blockchain network by confirming transactions. In return, they are rewarded with new coins.

Staking, however, is only available to Proof-of-Stake (PoS) cryptocurrencies. This is because the PoS model does not require massive amounts of electricity and computing power like the Proof-of-Work (PoW) consensus algorithm originally developed for Bitcoin.

So, users only need to lock up a certain amount of their coins or tokens to become trustworthy enough to operate the blockchain network. The more crypto you pledge (stake), the higher your chances of becoming a validator since the system considers you more trustworthy than other users.

In return, whenever you help validate and record a new block to the blockchain, you earn staking rewards in the form of the native cryptocurrency.

Although the reward often comes in the same coin/token you used to stake, some projects allow you to stake one coin and get the other as a reward.

Which Coins Can You Stake?

Some coins that allow staking include:

• Algorand (ALGO)
• Cardano (ADA)
• Cosmos (ATOM)
• Ethereum (ETH)
• Flare (FLR)
• Flow (FLOW)
• Mina (MINA)
• Polkadot (DOT)
• Polygon (MATIC)
• Solana (SOL)
• Tether (USDT)

Flexible Staking Vs Bonded Staking

The key difference between flexible staking and bonded staking lies in whether participants are required to lock up cryptocurrency as collateral.

In flexible coin staking, participants in the network (validators) are not required to lock up a specific amount of cryptocurrency as collateral to participate in the staking process. They can freely move their staked assets and may have more flexibility in terms of entry and exit from the staking system.

The lack of a strict bonding requirement means that participants can join or leave the staking network more easily without waiting for a specific unbonding period.

As for bonded coin staking, validators commit a specific amount of cryptocurrency as collateral (bond) to participate in the staking process.

The bonded funds are usually held in a locked state for a predetermined period, and during this time, the bonded stakers have a chance to participate in the consensus process and earn staking rewards.

The bonding requirement incentivises validators to act honestly and avoid malicious behavior, as they have something at stake. If a validator behaves maliciously, they risk losing their bonded funds.

Benefits of Coin Staking

Staking emerged as a more energy-efficient alternative to mining, which is hugely popular with Proof-of-Work mechanisms like Bitcoin. Crypto mining, for instance, consumes a lot of electricity since the computers have to work non-stop to verify transactions.

Besides, people usually invest thousands of dollars into equipment to increase profits. With cryptocurrency staking, there’s none of that.

All you need to do is buy crypto, lock up your coins inside a staking pool and sit back to enjoy the privileges and benefits. You don’t lose your coins either, but some projects might require you to stake your coins for a specific period. In that case, you’ll be penalised if you withdraw or sell your crypto (also known as unstaking) before the staking period expires.

Many upcoming DeFi (decentralized finance) penalize users who unstake their crypto early to protect the project and prevent price manipulation. Locking up your coins for a specific period of time shows that you have faith in the project and encourage others to invest, thus further increasing or stabilizing the price of the coin.

Furthermore, you’ll be helping to maintain the security and efficiency of the blockchain whose coin you’ve staked.

That said, you may find some projects that allow you to take your coins and withdraw them anytime you want, with no consequences.

Why should I Stake Cryptocurrency?

The biggest benefit of coin staking is that it offers a simple way to earn interest on your own cryptocurrency. Rather than wait for years for the next crypto bull run to come and take your crypto to sky high, you can simply stake them and start earning profits right now.

Yes, you will still be able to wait for the price to increase, but while you’re waiting, why not start receiving rewards for holding crypto? Think of staking as a way of earning twice from your crypto – like holding shares and still receiving quarterly dividends.

In truth, staking is not new. People have been engaging in coin staking for a long time, except that cryptocurrency allows you to do it in a decentralized way.

How Much Can I Earn From Staking Crypto?

You don't usually need a lot of cryptos to stake. Most platforms ask for a minimum amount so as to make staking of their coins accessible to almost anyone. On top of this, there are some nice rewards on offer for staking crypto. However, some coins offer better staking rewards than others.

So, it is important to conduct due diligence as to whether staking a particular coin suits your financial goals. Some of the things to consider include:

• How big is the reward?
• The size of the staking pool
• The amount of supply locked
• Is the project transparent enough to be considered trustworthy?

Rewards, however, are subject to fluctuations. Depending on the coin and how long you stake your coins, your staked assets can suffer a significant price drop that could ultimately outweigh any interest you earn on them.

Moreover, staking can require that you lock up your coins for a minimum amount of time. During that period, you can’t sell or withdraw your crypto holdings. Lastly, the unstaking period may take longer than expected (sometimes it takes days or weeks), which can be frustrating to many crypto users.

Earn Steady Profits By Staking Crypto

Use a crypto trading bot to automate the staking process, optimize returns, and minimize human error. Automated trading allows for more efficient and hands-free management of your assets.