What Is Crypto Staking? How Does It Work?
Updated: Dec 20, 2021
Cryptocurrency is all the rage these days. And while it might seem complicated, there are many ways to get involved. One way to make money with cryptocurrency is through staking. What exactly is crypto staking? It’s one of the ways that cryptocurrency users can earn money based on how much they have in their wallet. How does it work? Let’s find out.
What Is Staking?
Staking is when you let your coins in your digital wallet to help verify transactions. As the price of cryptocurrency skyrockets, so does the number of transactions. And with more transactions, there are more opportunities for hackers to get in and steal your money.
The way staking works is that if you help confirm these transactions, then you get a reward for doing so. The amount that you can earn varies significantly depending on what type of coin you stake.
For example, one popular form of crypto staking is referred to as Proof-of-Stake (PoS). This means that the user will receive their rewards based on how many coins they have in their digital wallet or reserve. It’s important for users to know how much they are getting paid per transaction before they consider this form of staking because it will dictate how much time and resources they need to invest into the process.
Another form of crypto staking is called Proof-of-Work (PoW). With PoW, the amount you earn will be determined by the computing power within an individual’s computer or laptop. Again, it’s crucial for users to know exactly what they are earning before deciding if this is a suitable
What Does It Mean To Earn Through Staking?
To understand how crypto staking works, you need to know a bit about how cryptocurrency works. Cryptocurrency is a currency that has no physical form and it’s not regulated by any central bank. Instead, its value is determined solely by the community which buys and sells it.
Crypto staking comes in two forms: proof-of-stake and proof-of-work. In proof-of-work, computers solve complex math problems to earn money, while in proof-of-stake, users have their currency in a wallet from where they can earn different percentages of profit depending on what type of currency they have in their wallet.
Users will need a specific type of wallet that supports cryptocurrency staking in order to get started. If you have a Bitcoin wallet or Ethereum wallet for example, then you would be able to stake your coins with them too.
How Do You Get Started With Staking?
The first thing you need to do is get a wallet. Wallets come in three different varieties: software, hardware, and paper. Software wallets are the most accessible because they can be downloaded onto your computer or phone for free. Hardware wallets are more difficult to set up but provide additional security through their physical storage of the private keys. Paper wallets are the easiest to set up and least secure—it’s important that you take precautions when storing them offline.
There are a variety of staking coins you can use, including Decred, Waves, Stratis, and Lisk. To start staking with a specific coin, you need to know how much of the currency you have in your wallet—or how large your stake is. You can calculate this by dividing your cryptocurrency holdings by the total number of coins available on the market.
For example, if I had 100 Lisk in my account and there were 1 million Lisk total on the market then my stake would be 10%. If I wanted to stake with Lisk then I would set up a wallet that allows me to send at least 10% of my holdings away from my main account so that it could accumulate interest while it's not being used.
Drawbacks Of Crypto Staking
Staking cryptocurrency can seem like a great investment opportunity. However, there are some drawbacks to the process.
A big one is that you need to have a lot of cryptocurrency in your wallet to earn anything. That’s because staking is proportional. That means that the more cryptocurrency you have in your wallet, the more you will earn based on how many coins are staked with the same coin type.
So, if for example you have 1 Bitcoin and it is staked with 20 other Bitcoin holders, then your share would be 1/21 or about 4%. You would make about 4% of what everyone with Bitcoin in their wallets would get. If you had more than 1 Bitcoin in your wallet, then you would get higher percentage rates off of what everyone else does with their Bitcoin. This might seem like a good idea at first glance but it does come back to that whole threshold thing again. You need a large amount of crypto in order to get any benefit from crypto staking so this can be frustrating for users who don’t have much crypto but want to try out the process anyway.