Staking is one of the best ways to generate passive income from cryptocurrencies. Instead of simply holding the cryptocurrencies, investors can stake them in pools and earn high yields. All cryptocurrencies that use the Proof-of-Stake consensus mechanism allow investors to stake cryptocurrencies. According to Statista, as of March 2022, Solana is the most-staked cryptocurrency in terms of total staked value.
Even though the staking process is profitable in general, it is also important for investors to do their research so they can make the most out of staking. In this article, we review how to stake crypto, what to consider before staking, and some of the cryptocurrencies that allow staking.
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Crypto staking is a process of locking funds for a period of your own volition in order to earn rewards and interest on the staked funds funds The ROI (Return On Investment) through staking is typically higher than the interest funds would earn while stored in a standard bank account.
Technically, staking is the process of verifying transactions on certain blockchain networks. The underlying technology of cryptocurrencies requires a consensus mechanism to maintain the integrity of the blockchain. The Proof-of-Stake consensus mechanism requires participants, or validators, to verify the transactions while staking cryptocurrencies. It is also an energy-efficient process when compared to the traditional Proof-of-Work mechanism.
We can only stake the cryptocurrencies that use the Proof-of-Stake consensus mechanism. Cardano, Solana, Avalanche, and Ethereum 2.0 are a few examples of the cryptocurrencies that allow staking.
Major centralized crypto exchanges enable their users to stake cryptocurrencies in return for incentives. These platforms stake cryptocurrencies on behalf of their users. Most of the exchanges charge commission on users’ staking rewards and also provide high yields. Leading platforms like Binance and Coinbase allow users to stake cryptocurrencies and reward them in return. Binance’s high-yield center feature provides a high yield of up to 104.62% APY through staking cryptocurrencies like AXS, SHIB, AVAX, NEAR, LUNA, ADA, and MATIC.
When we use exchanges to stake, investors join “staking pools” that are operated by other users and lock their funds in the pools to earn rewards. By connecting the crypto wallet to the validator’s pool, investors can transfer and lock their funds for a certain period. However, before transferring the tokens, investors need to check the legitimacy of these pools.
Validators are a part of the blockchain network, and they verify transactions to keep the network safe. Validators stake coins and are selected randomly to validate the transactions. When they validate a transaction successfully, they will be rewarded with coins. Investors can earn staking rewards by becoming validators themselves. However, being a validator to earn staking rewards is a complex process when compared to the previous two methods. Additionally, being a validator requires users to make a huge initial investment.
It is important to take certain factors into account before choosing a cryptocurrency to stake. If we take a calculated approach by considering the ins and outs of a cryptocurrency, we can increase the profits through staking. We have listed the three most important factors below, which can help you choose a cryptocurrency to stake.
- Coin value — Coin value plays a crucial role in the long term. Investors should avoid staking a cryptocurrency that has a high inflation rate. They may earn high rewards initially, but it may not be profitable afterwards. Investors can be left with little to no profits.
- Fixed supply — Before choosing a cryptocurrency, investors need to make sure that the coin has a fixed supply. When there is limited circulation of the coins, the price will be on the constant rise when the demand increases. Staking these kinds of cryptocurrencies will be profitable in the future.
- Real-time application — The inherent value of a cryptocurrency depends on its real-time applications. If it is used for a wide range of applications in the real world, its demand increases, and as a result its price also increases. Before choosing a cryptocurrency to stake or invest in, it is always advisable to evaluate its use cases in the real world.
Cryptocurrencies that use consensus mechanisms other than Proof-fo-Stake cannot be staked. However, most of the cryptocurrencies are using Proof-of-Stake as it consumes less energy compared to Proof-of-Work. Let us look at a few best cryptocurrencies used for staking.
Solana aims to create an efficient blockchain network with super-fast transactions at cheaper fees. It is the leading cryptocurrency in terms of total value staked, mainly because of its speed and considerable staking rewards. Investors can delegate their coins to validators and lock them for a certain period to earn high returns.
Terra also uses the Proof-of-Stake mechanism and makes the process of investing and staking the LUNA coins simple. Besides LUNA, the network also enables the creation of algorithmic stablecoins pegged to traditional assets. The high annual staking reward of LUNA tokens makes it one of the best cryptocurrencies to stake.
Ethereum is the second-generation blockchain with numerous decentralized applications built on top of it. When the Beacon chain went live as a part of the Ethereum 2.0 upgrade, the network started supporting the staking of ETH coins. Investors need 32 ETH to be a validator and verify the transactions. However, if they would like to stake a lesser amount of ETH, they can join staking pools.
Several other promising cryptocurrencies such as Cardano, Avalanche, Polkadot, etc also allow investors to stake the coins and earn rewards. However, it is essential to keep several factors in mind before choosing a cryptocurrency and a platform for staking. With proper research and understanding, staking is a great opportunity to generate passive income from present crypto holdings.
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