What is staking?

Staking lets cryptocurrency holders put their assets to work while strengthening blockchain networks. But how does it work? And exactly what does staking crypto mean?

By locking up your cryptocurrency, you help validate transactions and maintain network security. In return, you earn rewards, often in the form of additional crypto.

For investors in the Web3 space, staking offers a way to earn passive rewards while contributing to the decentralized economy.

How Does It Work?

Staking is an essential part of proof-of-stake (PoS) blockchains like Ethereum or Solana, offering an alternative to the proof-of-work (PoW) model used by Bitcoin. When you stake a cryptocurrency, you lock your assets within the network for a specific period. The length of the lock period will depend on the platform and blockchain. 

PoS blockchains rely on validators to confirm transactions and add new blocks to the chain.  Unlike PoW, which requires solving cryptographic puzzles using highly specialized hardware, PoS selects validators based on how much crypto they stake. 

The more assets a participant stakes, the higher their chances of being chosen to validate transactions. In return for their contribution to maintaining the network, validators typically receive block rewards in the form of newly minted cryptocurrency or a share of transaction fees. 

Potential Benefits and Risks of Staking Crypto

Staking is a way to generate passive rewards while contributing to blockchain security. Unlike trading, it offers an alternative method to grow holdings without active management. But, like any strategy, it comes with both benefits and risks.

The Benefits of Staking Crypto

• Passive rewards potential: Stakers receive payouts in the form of additional tokens, similar to earning interest on a savings account. These rewards vary based on the network, staking duration, and the total amount staked.

• Enhanced network security: Staking strengthens a blockchain network’s security by incentivizing participation. Validators who stake assets help confirm transactions and maintain the network's integrity. The more assets staked on the network, the more resilient it can become against attackers.

• Lower energy consumption: Staking on a PoS blockchain is far more energy-efficient than mining on a PoW one, as it eliminates the need for energy-intensive computational work. The most well-known case for this is Ethereum’s transition from PoW to PoS in September 2022, a process known as The Merge that reduced Ethereum's energy consumption by about 99.9%.

• Potential for price appreciation: If the value of the staked cryptocurrency increases over time, stakers may see an increase in the overall value of their holdings—both from price movement and earned rewards. 

The Risks of Staking Crypto

• Locked liquidity: Because staked assets are typically locked for a set period, you can’t sell or access staked funds until the staking period ends. This can be months and may pose challenges if you need liquidity during market downturns or emergencies.

• Market volatility: The value of staked tokens can be volatile. An investor’s overall portfolio may decline if the cryptocurrency price drops, potentially outweighing the benefits from staking reward rates.

• Network or protocol changes: Changes in blockchain protocols, governance decisions, or regulations can affect staking rewards, lock periods, and network viability. You can mitigate these risks by staying up to date with news about the network itself, but some changes may happen unpredictably.

How to Stake Crypto

While the specifics of staking crypto vary by platform and currency, the general process involves choosing a cryptocurrency, selecting a staking method, and committing assets to the network. 

Here’s how you would typically get started staking:

• Choose a staking-compatible cryptocurrency. Only certain cryptocurrencies support staking, primarily those using a PoS consensus protocol. Popular options include Ethereum (ETH) and Solana (SOL).

• Select a staking method. Investors can stake through centralized exchanges or a digital asset custodian such as BitGo. Other options, such as decentralized staking pools and running your own validator node, are more complicated to set up.

• Choose a validator or staking platform. If staking through a decentralized pool or directly on a blockchain network, select a reliable validator by considering uptime, commission fees, and reputation. If staking on a centralized platform, research platform fees, lock-up terms, and withdrawal flexibility.

• Delegate or lock up assets. Depending on the method, users either delegate tokens to a validator or lock them in a staking contract.

• Monitor rewards and unstaking conditions. Staking rewards accumulate over time, but unstaking periods may vary. You may need to be strategic with your planning if you can’t access the crypto for a long time.

Staking Coins and Platforms

Several cryptocurrencies support staking, each with unique mechanisms and rewards. 

Ethereum uses a PoS model where validators must stake 32 ETH to participate, though delegation options exist through staking providers. Cardano uses its unique Ouroboros PoS system. Solana, known for its fast transactions and low fees, is another popular option. Others include Polkadot (DOT), Avalanche (AVAX), and Tezos (XTZ), each offering different staking rewards and lock-up periods. 

Popular crypto-staking platforms include Binance, Coinbase, and Crypto.com. If security is a priority for you, BitGo’s stakeable token management services provide a reliable way to store and stake coins. 

However, before selecting a platform, you should always compare fees, reward structures, and withdrawal conditions to determine which ones suit you.

Staking Methods

Staking can be done in several ways, each offering different levels of control, risk, and reward. The best one for you depends on your risk tolerance and staking goals.

• Exchange staking: Many crypto exchanges offer staking services. This is a beginner-friendly option but may involve lower rewards and platform fees.

• Delegated staking: In delegated proof-of-stake (DPoS) systems, users delegate their crypto to a trusted validator to earn rewards without managing technical aspects. This is a good option for beginners and is common in networks like Cardano.

• Staking pools: A staking pool allows multiple investors to combine their assets and stake collectively, increasing accessibility to rewards. Pool operators may charge fees, but this option provides flexibility for those without the resources or expertise to run a full validator.

• Solo staking: Running a personal validator node gives complete control over staking but requires technical knowledge, dedicated infrastructure, and the ability to meet minimum staking amounts (e.g., 32 ETH for Ethereum). While this method eliminates reliance on third parties, it also involves security risks and the potential for penalties (slashing) if a validator fails to meet uptime requirements.

Deciding If Staking Is Worth It

Now that you understand what staking crypto is, it’s time to decide whether it aligns with your strategy. Staking can generate passive rewards while contributing to blockchain security, but it comes with trade-offs. Consider risks like locked liquidity and market volatility before staking crypto.

Staking can be a strategic option for long-term crypto investors. Whether it’s a good strategy for you depends on your investment goals, risk tolerance, and liquidity needs.

Before investing your money, research staking rewards, lock-up periods, and platform fees. If security is a priority, BitGo Staking offers an all-in-one token management platform and a secure way to store and stake your crypto. 

FAQ

What is the process of staking in cryptocurrencies?

Staking involves locking up cryptocurrency in a proof-of-stake blockchain to support transaction validation and network security. In return, participants earn rewards, usually in the form of additional tokens. How much they receive is based on the amount staked and the network’s reward structure.

Are there any risks involved with staking crypto?

Yes, risks include market volatility, lock-up periods restricting access to funds, slashing penalties for validator misbehavior, and potential security vulnerabilities in staking platforms.

How can I start staking my cryptocurrencies?

It’s best to start by choosing a cryptocurrency that supports staking, selecting a staking method (self-staking as a validator, delegating to a validator, or using an exchange staking service), and locking up your tokens via a wallet or staking platform such as BitGo.