12/21/2023

Crypto staking. A deep dive into passive income on the blockchain

Crypto staking has emerged as a powerful mechanism in the world of cryptocurrencies, allowing users to earn passive income while actively participating in blockchain networks. This article explores the fundamentals of crypto staking, its operational dynamics, and the broader implications for the decentralized landscape.

What is crypto staking?

Staking is part of the process that certain cryptocurrencies use to verify transactions. It's all part and parcel of a consensus mechanism called “proof of stake.” This sees blocks of transactions added to a blockchain, an indelible string of “blocks” of transactions, by people who already hold a certain stake in that blockchain's native currency. The process is similar to the mining, used to add blocks to the blockchain of proof-of-work blockchains such as Bitcoin. The difference is, in the case of proof-of-stake blockchains (such as Cardano), the process is called forging (or sometimes "minting”), and the people who do it are called validators or forgers rather than miners.

If you have some proof-of-stake crypto, you have the chance to earn coins in exchange for your stake, with the specific amount depending on the currency at hand and just how you stake your coins.

How crypto staking works. Understanding the mechanism

Staking on a cryptocurrency exchange: You make your crypto available via an exchange for use in the proof-of-stake process. In essence, it enables holders to monetize their crypto holdings that would otherwise lie idle in their crypto wallet. In this approach, the exchange does much of the administrative work for you, seeking out a node for you to join so you don’t have to do it yourself. It's not completely risk-free, though—you do have to run the risk of entrusting your coins to the exchange and node in question.

Joining a staking pool: A staking pool enables stakers to earn block rewards by sharing their resources, similarly to a mining pool. These pools tend to follow a two-tier system, with an administrator overseeing the work of the validators and ensuring things run smoothly. When rewards are earned, they’re split between the pool operator and pool delegators , but some pools do additionally charge entry and membership fees.

Benefits of crypto staking. Beyond passive income

The primary allure of crypto staking is the opportunity to earn passive income. Validators are rewarded with additional cryptocurrency for their participation. This reward can be a percentage of transaction fees, newly minted coins, or a combination of both.

There are all kinds of reasons to stake crypto, including:

The potential for high returns (depending on the specific cryptocurrency you’re staking!).
The satisfaction of playing a key role in a project you believe in—proof-of-stake currencies simply couldn’t function smoothly without their stakers.

You don't need any equipment for staking.

Risks and considerations

Staking isn’t a risk-free exercise, however. You could run into some of the following risks of staking crypto:

The value of your staked crypto isn’t constant—as crypto prices are often highly volatile, your assets could plummet in value with little warning, making it a much less profitable endeavor.
Some proof-of-stake cryptocurrencies have lock-up periods, which means you won’t be able to access your crypto for a certain amount of time.
Depending on the approach you take, you might need to entrust your crypto to an exchange so it can be staked, which can lead to security risks.

Crypto staking represents a dynamic intersection of investment, participation, and technological innovation, offering a compelling avenue for both experienced and novice cryptocurrency enthusiasts. As the crypto staking landscape continues to evolve, users stand to benefit from the potential rewards and the broader positive impact on decentralized networks.