Crypto staking is an eco-friendly alternative to crypto mining. Staking is a process by which Proof-of-Stake blockchains verify new blocks as well as bring new cryptos into circulation. The agenda is the same as the mining process followed by the Proof-of-Work blockchains but the PoS process is always more eco-friendly than the former. The first ever staking crypto was Peercoin that was introduced in the year 2012. However, the PoS coins that were launched later have come to gain more prominence such as Cardano, Solana, Algorand, and so on. And with Ethereum joining the PoS bandwagon, the concept of staking has reached new heights of late. Read more about digital tokens that can be traded on a blockchain.
So, how does the process of staking work? And why is it being dubbed as more “green” than the PoW mining process? Well, the post below offers a brief on the major aspects of staking.
Crypto staking – what you need to know
First, crypto staking is exclusive of PoS blockchains.
Second, crypto staking, as mentioned above, is a process by which PoS blockchains verify every block before adding it to the genesis chain.
How does it work?
Crypto staking follows a completely different format of operation than crypto mining. If you are acquainted with the mining process, you know miners have to solve complicated mathematical operations to find the right hash rate for verification.
But, in crypto staking, no such mathematical equation is involved. PoS blockchains seek the help of crypto holders to execute the process. Put simply, if you want to participate in the staking process, you will need to have holdings of the PoS crypto that you want to stake. PoS blockchains need cryptos to execute the staking process.
As a staker, you would have to deposit a certain sum of cryptos to the PoS blockchain and the blockchain will keep the cryptos locked up till the completion of the staking period. You won’t be able to withdraw the locked cryptos before the completion of the staking period. In exchange, the blockchain will reward you with staking rewards. As stakers help a PoS blockchain to validate a new batch of blocks, they are officially termed as “validators”.
Two things must be mentioned here- minimum crypto requirement and staker eligibility.
Some cryptos command high staking requirements. For example, Ethereum staking demands as many as 32 ETH. But, then, most of the cryptos ask for just bare minimum staking requirements. However, your chances to be chosen as staker would be higher if you are willing to stake a large volume of cryptos to the PoS blockchain. The time-period of staking also plays a key role here. Some blockchains allow you to choose from a wide range of staking periods, such as 30 days to 60 days to 90 days, and so on. You will have a better opportunity if you choose 60 or 90 days instead of 30 days.
Staking rewards bring new PoS cryptos into circulation. On an average, staking rewards offer 10-12% APY (Annual Percentage Yield). However, staking rewards tend to vary from one crypto to another. Some altcoins might offer 50% APY – way more than some legacy coins- but new altcoins tend to fluctuate frequently. Thus, a smarter choice would be to settle with established cryptos even though these seem to offer nothing more than a decent APY.
While PoS blockchains reward stakers for staking, these platforms also impose penalties for illicit behaviors. In crypto jargon, this penalty is called “slashing”. If the blockchain finds out about unwanted tactics from the validator, a part of the staking reward would be burnt, leaving the validator with less than what s/he was slated to receive as staking reward. However, it must be stressed here, periods of inactivity from a staker/validator is also deemed as an offense by the PoS blockchains, even when the validator has no illicit intention. So, if you are absent from the staking network for a long time, you will risk having your reward “slashed”.
Why staking scores over mining?
A leading EV company had famously announced that they would stop accepting Bitcoin given environmental concerns. It must be stressed here that this EV company once was one of the biggest champions of Bitcoin. China, which used to be one of the greatest hubs of crypto mining, has officially banned mining activities for the safety of the planet.
Crypto mining is a high energy-consuming activity. It requires an incredible volume of computational power to solve the mining equations. The problem worsens when it comes to a bustling crypto ecosystem like Ethereum that accommodates a wide range of decentralized applications as well, added to cryptos. Crypto staking, on the contrary, does not demand stakers to solve complicated mathematical equations. As a result, the process does not need huge computational power and a colossal volume of energy to verify new blocks. Put simply, crypto staking offers a much “greener” and eco-friendly approach to block verification.
It’s self-explanatory why most of the new cryptos today are developed on PoS blockchain. Ethereum took a revolutionary step this year by merging its existing chain with a PoS chain. After its recent Merge upgrade, Ethereum now runs on a PoS blockchain.
Benefits for investors
Crypto staking benefits investors by offering them an additional stream of income from their idle crypto holdings. With staking, you do not need to purchase a batch of crypto separately. You can easily utilize the same crypto you have kept in store for HODLing.
While crypto staking is a welcome move, the process carries a bunch of risks as well. We have already discussed slashing but there are other risks too. For example, what if the crypto takes a dip after you receive the staking reward? You might also lose out on a high ROI trade opportunity during the staking period as you won’t be able to withdraw the amount you have put on stake before the completion of the staking period.
Thus, it’s better not to offer the entire batch of crypto holdings for staking. Just offer a part of it and reserve the rest for trading opportunities in the meantime, if any.