Staking is the buzzword that is currently taking the crypto world by storm. What makes it so lucrative? In simple terms, a consistent strategy of earning rewards by holding specific cryptocurrencies for a given time period.
Today, let us find out what is staking crypto, how it impacts the market, the risks associated, and whether you should invest in staking. So, let’s dive into the nuances of one of the fastest-growing trends in the crypto community.
Crypto Staking 101 – The Fundamental Concepts
What Is Staking Crypto?
Staking crypto involves putting digital assets in a smart contract for a PoS (Proof of Stake) network. Here the assets get used to validate transactions and secure blockchain protocol. As a reward, the owner of the assets receives passive staking profit.
How Does Staking Work?
In staking, you purchase crypto tokens to stake where each PoS protocol has its individual requirements. You can utilize coins from your wallet, which is a relatively straightforward strategy. Each node of the blockchain network gets selected to validate a given number of transactions. This allocation purely depends on the number of coins staked. The more the number of validated transactions, the more passive profit one earns.
Why You Should Stake Crypto – The Benefits
From apparent profitability to energy efficiency, multiple solid reasons are there for you to invest in crypto staking.
#1. A Sizable Amount of Passive Profit:
Essentially, staking in crypto can earn rewards with a low effort. Moreover, the process is simple, and several PoS-based cryptos can obtain a good interest without directly having to validate transaction blocks. As a result, staking becomes a reliable yet potent source of passive income. On average, 5 to 12 percent return is expected by merely locking the funds up.
#2. Participation Cost Is Negligible:
Unlike traditional passive investment strategies and financial assets, participation in staking is significantly slim. Thus, the investor can detour the higher fees to earn some profit through this cost-efficient mechanism.
#3. Environmental Friendly Mining
PoW or Proof of Work utilizes specialized computers to validate transactions within the blockchain ecosystem. These machines come with high maintenance costs and enormous energy requirements. In a PoW-based ecosystem, the miner employs more computers to reach a higher hash rate, which is favorable for faster and more reliable calculations. This energy expenditure has time and again negatively impacted the price of Bitcoin. Also, the carbon footprint in PoW validation is very high and impacts the environment negatively. Unlike, PoW, PoS establishes itself as a low-cost and greener alternative to validate transactions that yield better rewards without severely affecting the environment.
Why You Shouldn’t Stake Crypto – The Risks
Typically, staking doesn’t have high exposure to risk. However, when the market is in flux, the fluctuations can negatively impact the stakers.
- Loss of value: As a negative ripple of crypto ban or unwarranted price drops, your staking capital can lose its worth. In this situation, to become a full validator, you have to engage more funds to get the job done. Ultimately you will run into a loss.
- Automated market-making protocols: When you place your tokens in a staking pool, the capital becomes subject to an unprecedented plunge in the price. This situation can arise when project devs or large traders pull out their liquidity outright. As a result, other participants are deprived of enough liquidity as there is not sufficient left.
A Profitable Alternative – Crypto Arbitrage
A beneficial alternative to staking is investing in automated crypto arbitrage. This financial instrument has a relatively lower risk profile and a more optimized investment strategy to generate sizable passive profits annually. According to figures, it is feasible to obtain up to 45% annually and 3.7% monthly in returns. Furthermore, your balance will grow larger as you keep earning compound interest over your initial rewards.
Finally, remember that staking requires a lock-up period when your tokens are non-transferable. During this course, also known as the vesting period, you will not be able to trade staked tokens even if the price shifts, which is a significant drawback. Thus, one must necessarily conduct thorough research on specific staking requirements and rules of each project you want to get your hands on.