Cryptocurrencies have brought a myriad of new ways to make a profit. Among them is staking, which has become very popular lately.
The purpose of this guide is to explain what crypto staking is and how to get started. Moreover, we’ll answer how staking can be profitable and which projects you should take into account. Read on.
What Is Staking?
Like anything related to blockchain and cryptocurrencies, staking is essentially simple yet complex at the same time.
In essence, staking is a way for certain crypto holders to win rewards by “locking” their funds and providing liquidity or supporting a network that way. In other words, staking doesn’t involve wagering your funds — it actually represents a constructive way to run a decentralized network.
How Staking Works
Right now, the most popular way to earn Bitcoin is by mining it. This is because the Bitcoin network runs on the so-called Proof-of-Work (PoW) mechanism, which requires computers to do complex work (computations). However, many newer projects consider this too destructive for the environment, as mining computers consume too much energy.
As a result, a new consensus mechanism called Proof-of-Stake (PoS) was created. Instead of buying expensive rigs to mine BTC, you can now stake your funds and earn the right to run a decentralized network.
In PoW, miners receive newly minted cryptos for running the network, adding new blocks to the blockchain, and keeping the network decentralized. In PoS, rewards are reserved for those who stake their funds. In many cases, those who stake don’t have all the rights, nor can they run a full node (like miners). In addition, validating new blocks is usually reserved for those who stake the most money.
Still, everyone who stakes can earn a share of newly minted cryptocurrencies. These new coins are distributed as rewards to stakers. Although referred to as rewards, one can simply call them payments, as they do represent payment for being involved in the governance of a network.
However, staking cryptos isn’t always related to Proof-of-Stake mechanisms. Various projects have come up with innovative ways to stake coins and earn money.
For example, Ignite Tournaments is a project that provides a play-to-earn tournament infrastructure for esports. Players can stake their funds as a type of buy-in for tournaments and earn funds if they’re successful. On top of that, they can farm new tokens while playing.
Another interesting project is called Wanchain. Its goal is to develop a decentralized bank. It will work similarly to current banks, except for the fact that it will be using an innovative distributed infrastructure and a novel framework. All of that will be created with cross-chain interoperability in mind. Wanchain also allows staking crypto to become a node operator, but you can also delegate your coins to a node operator and earn a share of their incentive.
Finally, some crypto exchanges will allow their users to stake specific crypto pairs to provide liquidity. Liquidity determines how quickly one can swap coins. For example, if you want to swap BTC for a rare coin that’s not often traded, you might find it difficult to find someone willing to sell that coin and buy BTC. However, if stakers make a liquidity pool, the platform can use it to make your transaction instant. In that case, stakers are rewarded from the transaction fees.
How Staking Makes a Profit
Crypto staking is a great way to generate passive income. If you lock your coins, the algorithm will award you with a certain percentage of yield. Of course, some projects may require your involvement, especially if you run a full node in a Proof-of-Stake network.
Other projects have found different ways to monetize staking. In crypto exchanges, stakers earn from transaction fees, and in projects such as Ignite Tournaments, new tokens are mined while playing games.
To sum up, staking has taken the crypto world by storm. Even though it’s not as big as crypto trading or NFTs, it has a bright future, as many new projects include staking as part of their ecosystem. Of course, you have to be extremely careful with the project you choose to stake in, as not all of them are able to keep their promises.