Crypto-staking: how to earn on the blockchain

Basic Concepts

Cryptocurrency staking is an active participation in the functioning of blockchain networks by locking up one's assets. In return, participants receive rewards in the form of new coins and transaction fees. This mechanism has become a popular strategy for those looking to generate additional income from their crypto assets.

The principle is simple: you deposit cryptocurrency into staking, the network uses your funds to secure itself, and you receive rewards for it. This is an alternative to traditional mining, which requires significantly fewer computational resources.

How is this related to Proof of Stake

Proof of Stake (PoS) is a consensus mechanism that replaced the energy-intensive Proof of Work. Unlike PoW, where miners solve complex mathematical problems, PoS selects validators based on the amount of cryptocurrency they are willing to lock in the network.

Such a system has proven to be more effective and environmentally friendly. Ethereum, Solana, Cardano, Polkadot, Avalanche, and Cosmos – all are PoS-based networks where staking is actively developing.

How the whole process works

The mechanism consists of several stages:

Selection and Verification. The network selects validators based on various criteria: the amount of capital staked, the duration of participation, and sometimes random selection. The selected validators verify transactions and ensure their legitimacy.

Block formation. Verified transactions are grouped into a single block, which is added to the distributed ledger of the blockchain.

Receiving rewards. Validators receive a portion of the fees and new coins for their work. The amount of the reward depends on the contribution and activity of the participant.

Staking Participation Options

Depending on your knowledge and capital, you can choose the option that is optimal for you:

Solo staking requires you to run your own node. You gain maximum control, but you also take on full responsibility. Mistakes can lead to slashing – a penalty from your stake.

Staking through exchanges – the simplest option. The platforms manage all the technical aspects, you just need to deposit funds and receive daily rewards.

Delegated staking involves sending your coins to a trusted validator. They handle all technical issues, and you receive a proportional reward.

Staking pools combine the resources of many participants. This is especially beneficial for small investors, as it lowers the minimum entry threshold and increases the chances of regular rewards.

Staking Pools and Collective Participation

A staking pool is a cooperative form of participation where participants combine their coins to increase the chances of being selected by a validator. Rewards are distributed proportionally to each participant's contribution.

This approach democratizes staking, allowing less affluent investors to participate in the process. However, it is important to choose reliable pools with a transparent fee structure and a proven reputation.

Liquid Staking: A New Paradigm

Traditional staking involves locking assets for a certain period. Liquid staking solves this problem by allowing users to earn rewards while maintaining liquidity.

The mechanism is simple: when you deposit coins, you receive an equivalent liquid token (LST), which can be traded or used in other protocols. Rewards accumulate on the underlying assets, and you have access to their value through the tokens.

Some blockchains, like Cardano, offer native liquid staking, where rewards can be earned without intermediate tokens. This innovation has significantly expanded the accessibility and attractiveness of staking for most market participants.

Why You Should Engage in Staking

Cryptocurrency staking offers several advantages:

Passive income. Your assets work on their own, generating additional income without your active involvement.

Supporting the ecosystem. You directly contribute to the security and decentralization of the chosen network, helping it to grow.

Voice in Governance. In some blockchains, stakers receive voting rights when making important decisions.

Eco-friendliness. Unlike PoW mining, staking consumes almost no electricity.

For long-term holders, this is a great way to maximize the income from their assets.

Real Risks

However, staking is not without its drawbacks:

Market volatility. If the price of the cryptocurrency drops significantly, the rewards will not compensate for your losses.

Slashing Risk. Validators who make mistakes or act maliciously are penalized by their stake. Technical issues on your node can lead to significant losses.

Centralization of the network. If a small group controls the majority of the stake, it threatens the security of the network.

Technical Failures. Errors in smart contracts or various software can freeze your funds or lead to their loss.

Dependence on third parties. If you use external services, you trust them to manage your funds. Hacker attacks on platforms can lead to theft.

Practical steps to get started

Step 1: Choose the right cryptocurrency. Make sure it supports the PoS mechanism. Ethereum, Solana, and Cardano are proven options with a sufficient level of security.

Step 2: Set up your wallet. Use popular Web3 wallets that are compatible with staking. Prioritize projects with a good reputation.

Step 3: Start with staking. Choose a format that suits you: run your own node, join a pool, or delegate coins. Always conduct your own research before investing significant amounts.

How rewards are calculated

The size of the reward depends on several factors:

• The amount of your stake
• Duration of participation
• Total volume of coins in staking in the network
• Commissions and the level of inflation

In most blockchains, rewards are measured by an annual percentage rate (APR), which facilitates planning. Some networks offer fixed rates, while others offer variable rates.

Can funds be withdrawn at any time

In most modern networks, yes. However, the rules vary. Some blockchains allow for instant withdrawals, while others impose a waiting period or penalize early withdrawals by deducting a portion of the rewards.

The 2023 Ethereum update has simplified withdrawals: stakers can now automatically receive rewards and withdraw their ETH without restrictions.

Why Not All Cryptocurrencies Support Staking

Staking is only possible in networks that use Proof of Stake. Bitcoin, which uses PoW, does not support this mechanism. Even among PoS projects, not all cryptocurrencies provide for staking – many use alternative incentive models.

Conclusions

Cryptocurrency staking is an effective tool for earning passive income and participating in the development of the blockchain ecosystem. However, it is important to understand the associated risks: volatility, technical issues, slashing, and reliance on third parties. By choosing a reliable network and method of participation, you can effectively utilize your assets while also supporting the security of the chosen platform.