Crypto Staking For Beginners - Highs and Lows

Crypto Staking For Beginners - Highs and Lows

Cryptocurrencies have swept the global financial landscape in the last four years. With Bitcoin becoming a household name, many people are paying close attention to what banks and other legacy financial institutions once called ‘magic internet money’ (MIM).

Besides enabling permissionless value transfer, the crypto industry is renowned for its promising and strong narratives. These narratives include sub-sectors like non-fungible tokens, real-world assets (RWAs), virtual reality (Metaverses), memecoins, and most importantly staking.

While other narratives are quite advantageous, they require a level of technical know-how to unlock their full potential. This is not the case when it comes to crypto staking as it works like your regular savings account in your local bank. In this introductory article, I will work you through what crypto staking is all about, how it works, and the industry relevance as crypto assets become a staple in our new economy.

Lock Assets, Get Rewarded

Crypto staking is a concept that underlies the idea of securing a blockchain network. For those not conversant with what a blockchain is, it is a distributed ledger technology that records transactions in a permissionless and transparent manner. Each transaction verified and added to a block is immutable (cannot be modified) and is often executed by computing nodes called miners or validators as the case may be.

In regards to staking, it is geared towards securing a proof-of-stake (PoS) consensus algorithm. Why PoS? It is because PoS networks require validators to stake or lock-up a portion of the network tokens before they can verify transactions executed on the network. Besides validators, regular token holders can also choose to stake their digital assets in order to secure the network through delegation. As a form of incentive, the underlying PoS network often pays stakers a certain percentage from newly created or minted network tokens.

While Bitcoin is the most popular crypto brand, it does not inherently support staking due to its limited scripting architecture. Built by Satoshi Nakamoto in 2008, Bitcoin only focuses on permissionless value transfer and serving as a digital store of value. It also operates on the energy-intensive proof-of-work (PoW) consensus algorithm. Ethereum and newer generations of blockchains with more robust technical frameworks allow users to stake their network tokens. This ends up preventing malicious attacks from bad actors to impact the network.

How Does Staking Work?

Crypto staking is quite simple in concept and practice. With the pivot from an energy-intensive computing unit like the PoW, the need for a secure mechanism to keep blockchain networks safe brought about the concept of staking. Under the hood, the fact that a decentralized group of people pool their tokens together ensures that no single entity or person controls a large portion (often 50%) of the network’s computing resources.

This is done to prevent a double-spending issue which the PoW algorithm addresses naturally with its competitive layout. A double-spend is a situation when transactions are rolled back allowing for the digital asset to be spent twice. A more robust article addressing this will be published soon.

With the option of staking, PoS blockchain networks create a more distributed outlay which ends up keeping them safe. 

Stakers often follow these steps to protect a blockchain network from malicious attacks:

For a start, they select a PoS blockchain network like Cardano. Next, they purchase the ADA token which is the utility asset bordering the peer-reviewed network. Once ADA is safely stored in a crypto wallet, stakers can visit the Cardano staking website or validator pool and select a validator they intend delegating their digital assets to.

The final step is to stake ADA tokens and earn rewards from them. Most times, the staking rewards are decided by the validator a user locks their tokens with. The rule of thumb is to stake with a verified validator who holds a significantly lower amount of tokens in their pool. They generally tend to pay higher rewards in order to incentivize stakers to delegate their tokens to their pools. 

Benefits of Crypto Staking

To those who are not convinced whether crypto staking is a good option, here are some of the benefits attached to it.

• With crypto staking, users are rewarded with new cryptocurrency for locking up their digital asset. This can end up becoming a passive income stream for users who stake on a blockchain network. This works like a regular savings account as users get a reward for keeping their funds locked. 

• Staking is the easiest avenue to access the crypto and the web3 landscape as a whole. This is because it does not require any technical know-how to lock-up and secure a blockchain network. 

• PoS networks are very big on community and often provide a platform where people can vote on proposals and overall network direction. Stakers are given exclusive privilege to participate in governance and vote on proposals and also dictate how the PoS network should be run. Given this, the higher the amount of staked tokens, the higher the voting powers of a staker.

• Staking attends to the primary need of all PoS networks which is to ensure decentralized safeguard of the network. With people locking their tokens against actively trading them, it ensures that transactions are constantly executed by a larger group of pools rather than singular entities. 

Demerits of Staking

• Stakers often have zero access to their tokens during lock-up periods. This means they cannot buy or sell their digital assets until their staking period ends. This can see them miss out on potential earning opportunities.

• Most PoS networks impose a penalty called slash. Slashing is when the locked asset of a validator or staker is reduced by half. For instance, the minimum staking amount on the Ethereum network is 32. Slashing can see this amount reduced to 16 and the staker potentially kicked out. This technique is done to enforce honesty by validators of the network.

• Cryptocurrencies often undergo several price changes in a 24-hour window. Hence, stakers can see the value of their locked funds reduce during a bearish run in the market. 

• In the event of a staker holding a large portion of a PoS network’s token, there is the risk of centralized control creeping in. This is because stakers with a high amount of tokens have a high voting power in the network which can make it hard for those with lesser tokens to have their opinions heard. Hence, PoS networks with zero concept of decentralized staking system can see their operations controlled by a select group of people - an ideology foreign to the crypto space. 

Final Thoughts

Crypto staking is a flourishing industry with billions of dollars in market valuation recorded. It currently represents the most accessible means of generating a passive income in crypto and securing a blockchain network. With the decentralized economy getting massive interest from legacy firms, more people will turn to crypto staking as a means of breaking even in their finances.

Another crucial thing is that most crypto staking networks pay higher reward rates for securing their protocols than a traditional bank. But this does not mean it is fool-proof. Crypto staking means locking up your assets with a fixed timeframe during which you have zero access to them. Price depreciation can see you earn less than in fiat valuation than what was initially locked up.

Hence, remember to do your own research (DYOR) before committing to staking.