The crypto space offers vast earning mechanisms with relatively high return investment or trading activities. One of the unique approaches that contribute significantly to the earnings of crypto market participants and the security of blockchain and the crypto space is staking.
However, to participate, there is a need to understand crypto staking and the available approaches and the risk associated with this earning approach. This article explains cryptocurrency staking, highlighting the different types of staking methods and the benefits staking provides for users.
What is staking?
Crypto staking is the act of pledging your cryptocurrency to support the blockchain’s transaction validation. Typically, validators in the network will validate transactions, and you can stake them easily through programs at many large exchanges and through the blockchains validators. The incentive for staking is earning rewards as an APY%.
How do I earn by staking my coins?
First, staking cryptocurrency in a blockchain allows holders to participate in a consensus mechanism referred to as Proof-of-Stake. Another approach is employed by several crypto projects where users can lock their tokens and get rewards in the designed APY.
Proof-of-Stake Explained
While Ethereum moved to the Proof-of-Stake consensus mechanism after the introduction of its Layer2 structure, Ethereum Merge, blockchains like Aptos and Fantom are designed with the Proof-of-Stake mechanism to validate transactions on the blockchain. Essentially, this mechanism operates on the activities of the Validators, who are required to forge new blocks and validate nodes for every cryptocurrency transaction.
Users need to hold and stake a certain amount of the ecosystem token to join the validator set. For instance, the Aptos network requires a minimum of 1 million $APT tokens and a maximum of 50 million $APT tokens.
Validators with higher stakes essentially get a higher chance to validate transactions and add a new block and therefore earn a reward for maintaining the blockchain’s security, transparency, and scalability. To participate in this, users can either stake the required amount of coin or join a staking pool where crypto holders come together to stake in the pool and enjoy a high validating chance.
Staking in crypto ecosystems
The recent approach to staking in crypto provides liquidity for crypto projects like play2earn, move2earn and crypto exchanges.
For instance, the holder of a particular token can lock it in line with the available vesting periods and earn a reward per the designed APY (Annual Percentage Yield). This prevents significant token holders from selling all their tokens simultaneously and can help maintain favorable token prices.
Several tokens are available for this option. For example, the Axie Infinity ecosystem gives users a staking mechanism for its $AXS token. This mechanism is found in several other ecosystems, including Yuga Labs’s Benji Bananas.Decentralized exchanges like Pancakeswap offer an interesting earning mechanism by staking some of its Liquidity Provider Tokens. With this, users can earn rewards in two different ways. First, liquidity providers get LP tokens and earn reward for providing liquidity in the ecosystem. Then they can also get rewards for staking the LP tokens.
Advantages of Staking
- Source of passive income
Staking is an earning approach that does not require any trading activities. Token holders can lock for a particular vesting period. The reward is calculated on a percentage basis, often determined by the amount of token staked and the number of days or periods it is staked for.
- Easy to use
Staking is arguably one of the easiest ways of earning rewards for cryptocurrency. It does not require high technical or crypto knowledge or constant trading. Token holders lock up their tokens and earn daily rewards on them.
- Governance
Staking in crypto has several other benefits, including earning and governance power. Staking in some ecosystems comes with voting power that allows holders of staked tokens to participate in the governance and decision-making of the ecosystem.
- Prevent drastic fall in token price.
Staking tokens restrict holders’ access to the token. Simply put, you cannot transfer your tokens during the vesting period. This cumulatively reduces the token amount in circulation while increasing the market capitalization and the total value locked. The combination of these impacts enhances the stability of prices, effectively decreases drastic price falls, and helps achieve a notable upward trend in token prices.
- Enhance the security of blockchain.
Staking in a blockchain that uses the Proof-of-Stake approach comes with two results. Validators either get rewarded for staked tokens and block validated or penalized for validating fraudulent data on the blockchain. The penalty is often loss of assets staked.
This gives users a stable and highly secured blockchain to facilitate transactions since a higher stake is required to participate, and fraudulent actions are penalized.
Conclusion
It is no news that the crypto space offers limitless earning opportunities to users. From trading to airdrop, yield farming, gleam giveaways and staking. While staking has many benefits, it is not always a suitable investment option for everyone for several reasons.
Staked cryptocurrencies are still volatile even though users cannot trade or transfer tokens during the vesting period. This may eventually result in an impermanent loss of assets due to notable reduction in asset value following a downward trend in the crypto market.
