Blog Crypto Staking Crypto: How It Works and Where to Start

Staking Crypto: How It Works and Where to Start

date May 2, 2022 time 5 min read 452 views

Ever wondered if you could be doing more with your crypto than leaving it standing in a wallet or exchange? The answer is yes, and staking crypto is one of the most promising ways to earn that little bit more. Even better, you’ll be helping to improve the crypto space and protect the environment in the process. 

If you’re interested in how you can use crypto to grow your money by doing something other than trading or HODLing, you’ve probably come across the suggestion to start staking crypto. It’s now become a widespread practice in the crypto world, and if you do it right, you could be in line for generous rewards and returns. 

What is staking crypto, and is it something you should get involved in? Keep reading to find out.
What is staking crypto, and is it something you should get involved in? Keep reading to find out. (Source: Unsplash)

But what exactly is staking crypto, and how does it work? Where do you start? And why can’t you stake bitcoin? We’ve got the answer to all these questions, so let’s dive straight in.

What is staking crypto?

When you stake your crypto, you commit to locking it away in return for rewards. Unlike buying a cryptocurrency and hoping it will increase in value, staking means you’ll know in advance exactly what return you’ll earn. Also, you may have to commit to staking for a fixed term (sometimes called a lockup or vesting period).

For instance, you might stake 1 SOL for an annual return of 12% APY over a six-month term. 

Think of it as the crypto equivalent to putting your money in a certificate of deposit or another restricted-access savings account—but usually a lot more profitable.

You can stake straight from some cryptocurrency exchanges (such as Coinbase and Kraken), but there are also plenty of external platforms to choose between, such as Stake Capital and Staked. Before committing to one place, make sure you’ve compared the returns, security measures, and the term length you can expect.

Pros and cons of staking crypto 

Given the guarantee of earning a little extra crypto, staking has become popular among those who want to HODL. If you’re going to keep the crypto over the long run anyway, why not make the most of it and maximize your rewards? 

You also don’t need any kind of specialist equipment unless you plan on being a validator (more on this shortly), so the entry barriers are low.

Yet that doesn’t mean staking is without its risks. If you change your mind about staking or a cryptocurrency’s value begins to slide, there’s not much you can do if you’ve already committed to a fixed term. This makes it riskier than standard HODLing, which gives you more flexibility and the chance to react to the market. 

Note that you can “unstake” your crypto in many cases, but this process usually takes a few days.

Which cryptocurrencies can you stake?

Tezos is one of the many cryptocurrencies you can stake to earn rewards.
Tezos is one of the many cryptocurrencies you can stake to earn rewards. (Source: Unsplash)

There are plenty of notable cryptos that allow staking, including:

  • Ethereum (thanks to the new transition to Ethereum 2.0)
  • Cosmos
  • Tezos
  • ADA 
  • DOT
  • SOL

You might have noticed we didn’t mention one major crypto in the list above. That’s because some cryptocurrencies aren’t suitable for staking, and it comes down to the mechanisms of their underlying protocols.

How proof-of-stake works

When you put your money in a bank or savings account, the financial institution will use it to invest in the market or lend to others, allowing them to grow their money. Something roughly similar happens when you stake: The money will go into a staking pool, which the protocol uses to help verify transactions.

This happens through a proof-of-stake mechanism, which is the very thing that allows crypto protocols to remain decentralized yet still secure for making payments. When someone makes a transaction a new block is added to the blockchain—but first, the block must be validated. Instead of a central authority playing this role, cryptocurrency protocols rely on “nodes” in their network to keep everything secure and legitimate. The process used is known as a consensus mechanism, because it involves multiple nodes coming to a consensus about a transaction’s validity.

In proof-of-stake, nodes effectively bet their cryptocurrency on whether a transaction is valid or invalid. If they make the right decision, they’ll receive a reward (or, if they’re incorrect, they’ll get a penalty). 

However, participating in staking doesn’t mean that you have to make this decision yourself—most of the time, your money will just be put into a staking pool and used by a validator. Becoming a validator requires specific knowledge and equipment, as well as a significant upfront investment (in Ethereum 2.0, you’ll need at least 32 ETH to get started).

Proof-of-stake vs. proof-of-work

Not every crypto protocol uses proof-of-stake to verify its transactions, and this is where bitcoin returns to the discussion. Bitcoin uses a proof-of-work mechanism instead, which means miners have to compete to find the answers to cryptographic puzzles, which increase in difficulty over time. They receive rewards in return for this.

You can’t stake all cryptocurrencies, and the reason why goes back to their consensus mechanisms.
You can’t stake all cryptocurrencies, and the reason why goes back to their consensus mechanisms. (Source: Unsplash)

The problem with this process is its reliance on increasingly powerful computers, which are needed to solve the puzzles. This is why bitcoin has been criticized so much for environmental problems, and why proof-of-work also tends to be a lot slower and less efficient. 

Meanwhile, proof of stake boasts faster transaction times and lower fees.

Ethereum also used to use a proof-of-work protocol, but it’s currently transitioning over to proof-of-stake as part of Ethereum 2.0, which aims to overcome the inefficiencies and high gas fees of its initial form.

So, staking isn’t just about making money—you’ll also be playing a vital role in keeping blockchain protocols secure and efficient.

Get started with our MCT token

Staking crypto is the perfect way of maximizing your profits if you believe in a cryptocurrency project enough to stick around for a while. Plus, you can sleep easy knowing that you’re also helping promising protocols to thrive and advance.

At MyConstant, we’ve recently launched our own crypto, and it’s perfect for those who want to access various aspects of the blockchain world all from one place. MCT token allows you to perform all kinds of financial transactions with one convenient token, from trading to borrowing to switching between cryptocurrencies. Plus, you can earn free MCT on MyConstant Airdrop.

Other benefits of our platform include:

  • 24/7 customer service.
  • Returns up to 14% APY.
  • Borrow from 6% APR.
  • Free withdrawals.
  • Staking for voting rights.
  • Store and borrow against over 70+ different cryptocurrencies.

Sound interesting? Sign up for a free account today.

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George Schooling

George Schooling

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