Those who dabble with cryptocurrencies will come across the term ‘staking’ quite regularly. In this guide we will take a look at what staking is, the different types of staking, why it is useful and how it benefits you.
Crypto staking emerged as a popular way for cryptocurrency holders to put their cryptocurrencies to work, and earning passive income. Moreover, staking takes tokens from the market, strengthening the token economy. In addition, staking can help to secure a blockchain network, making users participate in the act of network security.
Users who stake their tokens, often earn rewards for doing so. These rewards typically come in the form of additional tokens. This process is integral to many Proof-of-Stake blockchains, such as Ethereum.
This article explores staking’s mechanics, benefits, earning potential, comparisons with NFT staking, liquidity pools, and associated risks.
What is staking?
Staking involves locking cryptocurrencies or other digital assets. This either helps to secure a Proof-of-Stake blockchain network, such as Ethereum, or it helps to lock away token supply from the market.
Generally the project creator makes a smart contract where users deposit their assets. Often these smart contracts come with time slots, where longer lock up period come with higher rewards.
Staking and consensus mechanisms
Nowadays there aren’t many Proof-of-Work blockchain left. Most blockchains, including Ethereum, have pivoted to the much more eco-friendly consensus mechanism called Proof-of-Stake. Where Proof-of-Work relies on computational power from the network validators, or mining nodes, the Proof-of-Stake networks relies on community support.
Users need to stake their tokens with a validator node, and only validators with enough support may support the network and earn rewards. This makes staking a central part of the Proof-of-Stake consensus mechanism.
Validators stake their tokens as collateral, which incentivizes honest behavior. If they would try to trick the network, they run the risk of slashing. This would mean they’d lose a portion of their staked tokens. There are different variations of the Proof-of-Stake consensus mechanism, such as Delegated Proof-of-Stake or Liquid Proof-of-Stake. These mechanisms enhance network scalability and efficiency, reducing energy consumption compared to the somewhat old-fashioned (but powerful) Proof-of-Work.
How to earn from staking
Incentives to secure a network or reduce supply not only benefit the communit, the project, or the network. These actions also benefit you, because you can earn from it.
By staking your tokens and locking them away, users can earn yield. Typically the yield percentage is anywhere between 2 and 20% for the more established projects. However, newer projects that aim to attract stakers, could offers much higher percentages. In crypto, when the rewards are extremely juicy, there’s always a risk involved.
Users can stake their tokens directly with a network validator, or they can stake tokens or NFTs with the project itself. The projects determine the height of the community rewards themselves. For example, staking $RADAR gives you 15% interest per year, while you also gain access to the DappRadar PRO membership and the benefits that are included.
Not all staking is the same
There’s not one size fits all for staking, and the principles of staking have changed over the years. Sure, crypto staking involves locking up assets. However, what you lock away and the benefits it unlocks may differ per project.
For example, blockchain projects often use staking to secure their network. Users then earn token rewards in exchange for their support. However, gaming or SocialFi projects often utilize NFT staking. Here users may earn rewards like points for a potential airdrop, or in-game assets, or perhaps access to governance rights.
Again, DappRadar’s PRO membership is a clear example. Stake 30,000 RADAR and you get 15% APY. However, it also unlocks the PRO membership and all its benefits.
The risks of staking
Even though staking can be beneficial for those who lock their assets, but there’s also a serious risk. Market volatility may cause staked assets to lose their value. Because these tokens may be locked up behind a lock-up period, you’re not capable of quickly selling them. This may result in a significant loss in value.
In addition, when validators make mistakes and get slashes, you may lose a share of your staked assets. Moreover, smart contract vulnerabilities in DeFi platforms may result in the loss of your assets. We’ve all seen these examples before. We strongly advise every users interested in staking, to do thorough research and risk management.
Closing words
Crypto staking offers an accessible way to earn passive income while supporting blockchain networks, blending financial opportunity with technological contribution. However, risks like volatility and slashing require careful consideration. By understanding staking’s mechanics and potential, users can make informed decisions, contributing to the decentralized future while potentially growing their wealth.
