We tell you how the mechanism of operation of cryptocurrency networks with staking support works and how you can get additional income from it
With staking, you can use digital assets as a source of passive income without selling them. The staking process involves blocking crypto assets for a certain period of time in order to obtain the status of a validator in the blockchain network in which the assets are blocked. Validators are responsible for validating transactions on this blockchain and allowing it to keep running. For staking cryptocurrency, validators receive a reward in the form of new cryptocurrency.
To oversimplify, in some ways, staking is similar to placing funds in a bank account with a high interest rate.. This bank uses customer deposits to make loans, and those who deposit receive interest on the account balance.
Popular cryptocurrency networks Ethereum (ETH), Solana (SOL), Cosmos (ATOM), Aptos (APT), Celestia (TIA), Sui (SUI) and others use staking as part of the consensus mechanism and use it to build a functioning ecosystem.
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How does cryptocurrency staking work?
The blockchain operating algorithm of many popular cryptocurrency networks is based on the Proof-of-Stake (PoS) mechanism.. With this structure, those who want to support the operation of the blockchain by confirming new transactions and adding new transaction blocks to the chain place a certain amount of cryptocurrency in staking. For this, the network participant receives a reward.
The staking process ensures that only authentic data is added to the blockchain. After placing funds in staking and thereby obtaining the ability to confirm new transactions, the blocked assets of a network participant are used, among other things, as insurance. If low-quality or deliberately distorted data is recorded in the network, you can lose funds in staking. But if the data is confirmed correctly by the validating participant, he will receive more cryptocurrency as a reward.
Each blockchain has its own set of rules for validators and, as a rule, requires those wishing to participate in staking to deploy their own infrastructure – a network node or node. This requires some technical training. In addition, there is a minimum amount for staking funds, and it is often quite significant. For example, to participate in Ethereum staking it is required that each validator has at least 32 ETH locked (about $70 thousand. for January 2024).
There are intermediary services in the form of crypto exchanges or staking pools, whose operators take on the work of verifying transactions on the blockchain in the status of a validator.. A user of such a service can stake any amount without restrictions and receive income in proportion to the invested funds. In this case, he does not need to deal with the technical side on his own, and the interface of pools or staking services on exchanges is usually simple and accessible even for a beginner.
You can also use a cryptocurrency wallet that supports staking functionality. In this case, the wallet infrastructure essentially serves the same role as staking services.
Many large pools (for example, Lido or RocketPool) provide a so-called liquid staking service.. This means that when you stake funds in this pool, you receive a corresponding number of derivative tokens, which can also be used in various financial transactions to generate income. For example, when participating in Ethereum staking through the Lido service, the user locks his ETH coins in it, but immediately receives a derivative token – stETH, which can be used in other projects. This way, he simultaneously continues to receive income from staking ETH through the pool and has the opportunity to use the same amount of funds that he has locked (only in derivative tokens).
What is liquid staking. And how to make money on it
Benefits of Cryptocurrency Staking
Earning passive income. If you don't plan to sell your cryptocurrency tokens in the near future, staking allows you to earn passive income from them.
Availability. Using an exchange, pool or suitable crypto wallet, you can quickly and easily start staking a particular cryptocurrency.
Support for cryptocurrency projects. The more staking participants, the more resistant the blockchain is to attacks and manipulation, and its transaction processing becomes more efficient.
Bonuses in the form of airdrops. At the beginning of 2024, there was a tendency among developers of crypto projects to reward with their own tokens those who participate in staking the blockchain on which this project is built. Thus, those who placed tokens in the Solana or Celestia staking networks received quite generous distributions of tokens worth hundreds and even thousands of dollars from several services.
Risks of staking cryptocurrencies
Access to funds. When staking tokens, depending on the program, you will have to keep them locked for several weeks or months. During this time, you cannot withdraw funds, exchange or sell your tokens.
Exchange rate collapse. In the event of a major market crash, you will not be able to withdraw your staked assets. Even with high interest rates charged for staking, a significant collapse in the token rate can result in a loss.
Unscrupulous services. Many blockchain networks use an automated penalty mechanism (“slashing”) to punish dishonest validators by destroying a portion of their staking funds.. By placing funds in staking with an unscrupulous validator, you can lose part of your investment. However, none of the large services with a reputation has yet been subject to slashing, and the likelihood of getting caught by a validator who would deliberately manipulate data on the network is extremely low.
Concentration of one validator. If a lot of participants place funds for staking in one intermediary service, this service, in fact, acts as a single validator and takes over a significant share of the network. For example, the Lido service accounts for more than 30% of the total Ethereum staking volume. In theory, such large validators could manipulate the network or censor transactions on it.
Staking is a suitable option for investors interested in generating income from long-term investments and not worrying about short-term price fluctuations. It is worth carefully studying the terms for self-staking or the rules of the intermediary service to find out how long the blocking of funds lasts, and how long it will take to get your money back when you decide to withdraw it.