What is staking and how does it work?

Over 12 years have passed since the emergence of bitcoin. During this period, hundreds of different projects were launched, and the total crypto market capitalisation exceeded a record high of $3 trillion in 2021. Along with the industry’s development, there are mechanisms that regularly appear which are aimed at eliminating bottlenecks. One of these problems include the mining of new coins without causing harm to the environment. The solution was proposed as the Proof of Stake (PoS) algorithm back in 2012, which uses staking to keep the network running. This article outlines the mining method and why it is the future of the entire industry.

What is crypto staking?

Staking means earning passive income with cryptocurrency by holding coins in a wallet.

This process remotely resembles a bank deposit, although the placed funds are not used for investments and issuing loans, but to maintain blockchain functioning. Staking is a replacement for mining, allowing you to add new blocks and process transactions without solving complex mathematical puzzles.

How does staking work?

Staking is backed by the Proof of Stake algorithm. Literally, the name means ‘proof of ownership’. If a customer’s deposits in banks are used for lending and investments, in staking they are used to confirm transactions in the blockchain and maintain its operation. Confirmed transactions become new blocks in the network. The coins’ owners receive a reward for this. PoS protects the blockchain from outside interference and unreliability of placed data. Unlike mining bitcoin, staking does not require the purchase of expensive equipment or terawatts of electricity. That is why crypto projects that are powered by Proof of Stake are considered to be more environmentally friendly.

Popular crypto staking coins

Staking is only available for those cryptocurrencies that work on PoS. For instance, Cardano, Solana, MetaHash, Avalanche, Polkadot, Cosmos, NEAR Protocol, Algorand, Elrond, Waves and Binance Coin, as well as USDC, BUSD, DAI and USDT stablecoins.

In the future, Ethereum, the largest altcoin in terms of capitalisation, will shift to Proof of Stake. According to the project’s co-founder Vitalik Buterin, almost all major crypto projects have a working plan for such a transition. In an interview with UpOnly podcast, he also confirmed that he is helping the non-profit organisation, Dogecoin Foundation, with the transition of DOGE to PoS.

How to stake cryptocurrency?

To stake a coin, you can use the services of crypto exchanges, wallets and staking platforms.

For now, many major crypto platforms including Binance, Coinbase and Kraken support staking. Users of these and other exchanges use it to diversify income and monetise free funds. In addition, unlike trading, the clients of crypto exchanges are not required to constantly monitor market volatility, in order to receive maximum benefit. In the case of staking, the profit depends on the selected assets and the term of their placement.

You can also use hardware or cold wallets for staking. Such devices look like a USB flash drive and do not have access to the internet. The most advanced of these, such as Ledger, allow you to stake up to seven different cryptocurrencies at once. Offline coin staking is not the most popular type of staking, but its advantage is to provide better asset security.

Another option for staking cryptocurrencies, in order to receive passive income, is staking platforms. Unlike crypto exchanges and wallets, which are primarily used for trading and holding assets, staking platforms are exclusively dedicated to this service. This way, if you wish to earn profits specifically from staking, it is better to use one of these specialised platforms.

What is Proof of Stake?

Proof of Stake (PoS) is a consensus algorithm for processing transactions and creating new blockchain blocks. It was first implemented in 2012 as an alternative to Proof of Work (PoW) which powers the Bitcoin network and other projects.

PoW requires specialised equipment and immense computing power. In the case of PoS, the remote servers running software provide functioning of the blockchain: to do this, it is enough to have an ordinary laptop with a crypto wallet installed. The main requirement is to hold the required number of coins for staking in the wallet.

Basically, you are pledging your coins on the network in order to participate in the transaction confirmation process. The Proof of Stake protocol randomly selects one validator from the total number, taking into account factors such as the sum of assets, the staking period, how much time has passed since the last reward was received, etc. The more assets you have on your balance and the longer they are frozen, the higher the chance that your stake will be chosen to create a new block on the network.

Pros of staking

Staking, as an alternative to mining new coins, has several important advantages which include the following:

Opportunity to earn passive income

All you need is to simply keep holding the cryptocurrency on your balance for a certain period of time. The larger the amount of coins and the term period of staking, the higher your profit.

Low barrier of entry

You can start investing in staking with a small amount. For instance, on the aStake platform, you only need to buy 2048 MHC tokens, which is equivalent to about $15.

Additional income

Except for receiving rewards for staking, you can earn on the cryptocurrency’s rate. You can also increase profitability by joining a staking pool with division of profits between participants.

Eco-friendliness and availability

For staking, you do not need to have the special technical knowledge or invest in expensive equipment. Besides, unlike mining, which requires plenty of energy resources, staking does not harm the environment and an ordinary home computer is sufficient.

Cons of staking

Some disadvantages of staking are as follows:

You can’t withdraw coins from staking

Basically, here the same applies as bank deposits without the possibility of early withdrawals. While your coins are blocked during the staking period, you will not be able to withdraw or liquidate them. An exception is possible for so called flexible staking, however, in case of termination of the contract, the reward will be lower.

Cryptocurrency exchange rate volatility

Staking coins can significantly drop in value, especially under volatile market conditions.

Staking risks

The main risk of staking is investing in an unpromising project that can shut down at the initial stages. To prevent this from happening, you should avoid investing in cryptocurrencies that:

1. Are not listed on any exchange.
2. Do not have a detailed roadmap of project development.
3. Do not have the potential for further growth.

For instance, on the aStake platform, you can stake MHC tokens of the MetaHash network. Reasons ensuring the project’s  growth and development in the future include the following:

Processability

The MetaHash blockchain is based on cutting-edge developments that allow the network to process up to 100,000 transactions per second. In the future, this figure will increase to 5 billion transactions per day.

Reliability

MetaHash, which was created by a team of leading developers, has earned a reputation as one of the leading products in the blockchain technology market in just 4 years and has been added to the listing of popular crypto exchanges.

Goals and mission

The greater scalability of the network compared to all existing blockchains will allow MetaHash to make blockchain technologies a part of everyday life by reducing the cost and speeding up transactions. Besides, the MetaHash goal is to help any micropayments-related project to become fully decentralised.

Why aren’t all cryptocurrencies suitable for staking?

Only those cryptocurrencies that work with the Proof of Stake algorithm on the blockchain are suitable for staking. Although, not every project using PoS is a good investment choice. Preference should be given to coins with great development potential in the future.

When should you stake?

Staking is a great option to wait out the crypto winter (a long-term decline in cryptocurrency quotations), as well as periods of turbulence in global financial markets. Temporarily blocking of your assets on the blockchain will not only secure your funds, but also maximise profits.

Staking is also a good option because it has a low barrier of entry. However, you still need to have funds to buy coins and the ability to freeze them for a long period of time. As in the case of a bank deposit – the larger the initial investment, the higher your profit. To receive the maximum income, it is also important to choose a promising project for investment.

Where to stake cryptocurrency?

The best option for staking coins are specialised platforms. The entire process on such platforms is fully automated, so this method is perfect for beginners. All you have to do is just buy coins and stake them with just a few clicks. The system will do the rest for you. In the case of aStake, besides convenient functionality, a high potential reward of 17% per annum is among other advantages offered by the service.

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17% per annum estimated reward from MetaHash Network

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Conclusions

So is staking crypto worth it? Well, it is the best way to passively earn money for both experienced investors and beginners. Staking allows you to earn profits from the sustainable mining of new coins, thanks to what many crypto projects are planning to shift to in the future – the Proof of Stake protocol. Also, it provides an opportunity to secure funds and maximise profits during periods of unstable market conditions.