Crypto staking: what you need to know

What is staking crypto​?

To start off on the right foot, it is necessary to have a good understanding of what staking is. At the heart of the crypto world is the blockchain, a blockchain structure that is as innovative as it is very simple.

From coin transfer to smart contract writing, each transaction goes from node to node and receives several confirmations before getting final approval. This ensures higher security standards and generally enviable speed.

There are several different methodologies for operating a blockchain. The two most common are Proof-of-Work and Proof-of Stake.

In the first case, we are talking about mining, and Bitcoin is the most representative currency in this category.

Each transaction requires complex calculations to be solved by specially designed computers.

Miners are those who have these calculators: initially these were ordinary people who got trivial amounts of money as rewards.

Today, given the increasing difficulty of the mathematical problems to be solved, the power required by the computers has become enormous, and with it the necessary electricity. Therefore, mining is now reserved for specialized centers (so-called mining farms).

This methodology of chain operation is inefficient and involves high costs, as is also known environmentally (although mining is becoming increasingly green anyway). Therefore, a solution was sought that would provide better performance and lower operating costs. This is where Proof-of-Stake comes in.

This system does not involve mining and is based on the validation of each individual transaction.

Validators are people or teams who have set up computers specifically for this purpose. They get fees on each transaction as a reward for their service.

Theoretically, everyone could be a validator. However, while lower than the proof-of-work system, the computational and energy requirements are not within everyone’s reach. In addition, validators must ensure a good Internet connection and 24-hour operation.

This is where staking comes from: by locking a cryptocurrency in a specific repository, we contribute to the validation process without having expertise and equipment.

Staking is thus that process that serves to make a blockchain more stable, secure and performant.

The return we receive comes from believing and actively participating in the project. In fact, we are repaid for the trust placed in it.

In addition, staking a cryptocurrency makes the price more stable: since it is deposited, it is not sold and therefore the supply remains within acceptable limits.

Now that the picture is clearer, let us discover together the risks of staking.

Risks of staking crypto

Although not complex, staking also has its risks.

As a first step, by holding and staking a coin we expose ourselves to its volatility.

For example, by staking Solana when it is worth $200 apiece, we may suffer losses if it goes down a lot. Clearly, a price spike would lead to a gain: volatility works (thankfully!) the other way around as well.

Good news: in staking we are not exposed to impermanent loss as is the case in liquidity pools.

Another risk is that of platform problems, bugs or external attacks by malicious parties.

If in the CeFi world there is a fair amount of protection (there is a company behind it and we can contact them to fix it, like Binance) in the world of decentralized finance we would be at the mercy of events.

Some DeFi protocols have proven to be reliable and have helped users recover losses incurred in part or in full. Others, however, have not done so.

Therefore, caution is recommended, especially when interacting with new and not yet well-tested projects (this applies to everything, not just staking). In addition, one should also move cautiously on centralized platforms: if they have any insolvency problems, we may not see our money back.

Finally, not a risk but still one that we need to take into account: the timing of withdrawal of funds. In some cases, several days are required before we see the coins credited to our wallet again.

Other projects, on the other hand, allow you to retrieve your cryptocurrencies immediately or at least in a significantly reduced time frame. It is sufficient to inform yourself properly before proceeding.

"The risks of staking are small but still require careful prior assessment"

Crypto staking: get passive income with simplicity

We get it: staking crypto is simple and brings good returns. How to proceed?

First, we need to look at our cryptocurrency portfolio, set up the strategy, and decide which one we would like to stage.

By inquiring, we will find that there are usually multiple options for staking. It will be important to consider which platform offers the best yield-to-security ratio, also contemplating unstake timing, fees, and any other elements worthy of consideration.

Once the decision is made, the payout process varies by platform. Usually, however, it is really easy and takes no more than 3 to 4 clicks and 5 minutes to complete.

If the platform does auto compound, no further action is required on our part. In case this is not the case, we will have to perform this action ourselves from time to time.

Compounding involves collecting the rents obtained, reinvesting them immediately thereafter in the same place. Again, each platform has its own peculiarities but the mechanism is almost identical.

Unstake, on the other hand, is the opposite process to stake. It too is simple and requires only a few minutes of “work” to complete.

We have come to the conclusion of the article but the adventure has yet to begin: let’s start already today to study the various opportunities and put your coins to work!