Staking cryptocurrencies: what it is, how it works, how to earn

Cryptocurrency staking has become a popular source of passive income that allows you to leverage Bitcoin and other crypto assets held in a wallet. In some ways, staking is similar to depositing money into a high-yield savings account, with interest rates significantly higher than those of a traditional banking product.

In staking, cryptocurrency holders pool their cryptographic assets to support a blockchain network and verify transactions. In return, they are rewarded with annuities, similar to bank yields on deposits. However, it is important to note that these rewards are paid in cryptocurrency, which carries higher risks than traditional deposit accounts.

We have created this detailed guide to explain how to make money by staking cryptocurrencies. You will find out what staking is, how it works, and what risks and benefits you should carefully evaluate.

What is cryptocurrency staking?

Cryptocurrency staking is a process that allows you to earn by temporarily locking tokens or coins deposited in your wallet. This is to support a blockchain network and confirm cryptocurrency transactions based on "proof-of-stake validation".

In practice, cryptocurrency staking performs a similar function to mining used to mine Bitcoin, but with a few key differences. It is a process by which a network participant is selected to validate and confirm the latest batch of transactions on the blockchain. Unlike mining, which requires computing power to solve complex mathematical problems, staking relies on owning cryptocurrencies and actively participating in the network. In decentralized cryptocurrency exchange systems, there are mechanisms called Automated Market Makers (AMM) that allow you to temporarily lend the assets in the wallet to liquidity funds.

Staking is therefore used to earn interest on the cryptocurrencies committed and which will not be withdrawn for a certain period of time.

How does cryptocurrency staking work?

In detail, the staking process works as follows: cryptocurrency holders decide to make a certain amount of coins available in their wallet for the staking period. These coins are "locked" as collateral and are used to confirm transactions on the network. In exchange for their contribution, stakers are rewarded with new coins or transaction fees generated by the network.

The staker selection process can vary depending on the blockchain protocol. Some networks choose stakers based on the amount of cryptocurrencies they hold, assigning them the ability to confirm transactions in proportion to their participation. Other networks use complex algorithms or random selection mechanisms to ensure fair staking distribution. In general, the more tokens you own, the more likely you are to validate transactions.

As a reward for their efforts in the staking process, participants receive cryptocurrencies, which can be newly issued or come from transaction fees. This creates an incentive system that encourages users to maintain and support the network.

With staking, cryptocurrencies are temporarily blocked, but ownership is not compromised. Regardless of how you choose to stake, the coins do not move from the wallet.

How to make money staking cryptocurrencies

To earn with cryptocurrency staking it is essential that the wallet is always active. This implies that the computer used for the operation must always be on and connected to the network, 24 hours a day.

There are three ways to earn by staking cryptocurrencies:

1. Become a validator node: Some blockchain networks such as Solana, Polkadot, Ethereum, Algorand, and Cardano allow users to become validator nodes. This process is not for everyone and requires advanced technical knowledge. Becoming a validator also involves high entry costs: for example on the Ethereum network, it is necessary to have at least 32 Ether.

1. Via a centralized exchange: You buy cryptocurrencies that support staking and are locked in your wallet exchange for a certain period of time. The exchange will take care of the administrative work and the search for a node to join.

1. Participate in staking pools to "delegate" your tokens: thousands of users share their tokens in the pool to increase the chances of being rewarded. Validator pools can be centralized (CEX) or decentralized (DEX), based on smart contracts. The rewards obtained are divided between the operator and the delegated parties, but some pools may also charge a membership and membership fee. Decentralized staking pools generally offer higher returns but come with risks associated with smart contracts.

Before engaging in a staking mode, it is vital to do thorough research, and evaluate the block times, the rewards offered, and the level of risk associated with it. Each staking method has its specificities, and the choice depends on individual preferences and needs.

How much do you earn from crypto staking?

To calculate how much you earn with staking of cryptocurrencies it is necessary to analyze the technical characteristics and the distribution policy of the coin. Generally, the factors that determine how much you earn are:

• the number of cryptocurrencies owned;

• how long they have been owned;

• cryptocurrency inflation;

• the number of coins staked in the entire network of that cryptocurrency.

Staking interest rates may vary by network, but participants can earn up to 20-30% annually. On the most popular cryptocurrencies such as Ethereum or Cardano, the rewards vary from 5% to 20%.

Which cryptocurrencies allow staking?

The main cryptocurrencies on which it is possible to stake are those based on blockchains that provide a "proof-of-stake" consensus mechanism:

• Ethereum 2.0

• Solana

• Cardan

• TRON

• Avalanche

• Polkadot

• Polygon

• Kusama

• Algorand

• Tezos

There is a complete and up-to-date list on this site: https://www.stakingrewards.com/

What are the benefits of staking?

Staking has several benefits. The main ones are:

• Earn passive income: if you don’t plan to sell your tokens in the immediate future, staking allows you to collect rewards with potentially high returns.

• It’s easy: You don’t need any equipment to start staking in an exchange or staking pool.

• Support crypto projects of interest: Staking contributes to blockchain security and efficiency. By staking part of your own funds, the blockchain becomes more resistant to attacks, and its ability to process transactions is strengthened.

What are the risks of staking?

Staking is less risky than trading cryptocurrencies, but it still carries some risks that are important to consider. Here are some of the common risks associated with staking:

• Risk of losing funds: With staking, funds are temporarily locked in the smart contract or wallet of the staking pool. While the risks are generally low, funds could still be compromised due to a bug in the smart contract or cyber-attacks.

• Risk of node or pool failure: The validating node or pool may fail or go down. This could result in the loss of rewards or even part of the funds staked. Many projects require a set period of "lock-in" of the coins, which means that they cannot be unlocked or sold, even in the event of a large drop in price.

• Risk of Node or Pool Misbehavior: Node operators receive rewards if their node complies with the network consensus, but misbehavior can be sanctioned through the "slashing" mechanism. Sanctions may include reduction of rewards, confiscation of staked tokens, or suspension from staking activity. It is important for operators and participants in the staking process to understand the protocol rules to avoid penalties and maintain a safe and transparent environment.

• Cryptocurrency price volatility risk: Cryptocurrencies are known for their high volatility. Cryptocurrency prices can fluctuate significantly in the short term. In the case of converting the staking rewards into a different currency or selling the staked cryptocurrencies, there may be price fluctuations and consequent financial losses.

• Centralization Risk: In the case of centralized staking pools, there is a risk that a small number of participants or a single entity controls most of the decision-making power. This could compromise the system’s security and decentralization.

• Legal and Regulatory Risks: Depending on the jurisdiction you are in, staking may run into legal or regulatory hurdles. It is important to understand local regulations and carefully weigh the legal risks associated with staking cryptocurrencies.

Original article published on Money.it Italy 2023-06-29 07:17:00. Original title: Staking criptovalute: cos’è, come funziona, come guadagnare