What is staking and how it works?

Staking is a thing everyone hears about quite often in the world of blockchain. In general, it’s very close to a bank deposit.

Staking is a process that is becoming increasingly popular among various groups of crypto investors. It is a simpler and less energy-intensive alternative to cryptocurrency mining.

For investors, staking is a great opportunity to use their cryptocurrencies to generate additional income. It’s a tempting proposition that allows them to earn significant income while retaining ownership of their crypto assets. In addition, it remains independent of a possible rise in the price of a coin or token.

This type of investment offers cryptocurrency holders to use their assets to maintain the blockchain and, in return, receive rewards.

What Is Staking?

Staking is the procedure whereby cryptocurrency holders use their coins to add new blocks to the linked blockchain, receiving a reward in the form of additional coins.

The coins contributed are stored in the cryptocurrency wallet. This is how cryptocurrencies maintain the security and operation of the blockchain network. Also, this process can limit the commercial use of cryptocurrencies for reward.

How Does Staking In Crypto Work?

The basis of the staking principle is that participants can block a certain number of coins. Subsequently, after certain intervals, under the terms of the protocol, one of them is randomly assigned the right to confirm the next block. Generally, the probability of being selected is proportional to the number of coins. The more coins contributed and blocked, the greater the chance. In staking, the randomness factor makes it difficult to manipulate the results.

The process is similar to a lottery, with the number of cryptocurrencies available corresponding to a certain number of lottery tickets.

Staking also allows a proxy in which each participant delegates their voting rights and passive income to a trusted third party. In this way, these delegates receive all the verification fees. They pay their constituents a sort of dividend in exchange for their votes.

What Cryptocurrencies Can You Stake?

The use of staking is only possible as part of the proof-of-stake consensus mechanism, a unique tool used by some blockchains to select honest participants and verify new blocks of data being added to the network.

Staking is a radical new alternative to traditional mining. To form a source of passive income, the user does not need to purchase and set up expensive computer equipment or calculate the cost of electricity. Instead, it is enough to form a source of passive income to keep a digital asset in one’s account. Profits from staking depend on the cryptocurrency chosen and how long it is kept.

Let’s look at some of the most popular assets.

  1. Ethereum (ETH): It is a digital platform that uses blockchain technology and extends its use for various applications. Ether, its native cryptocurrency, is the second largest in the market.

  2. Cardano (ADA): It is a decentralized, open-source blockchain platform. The platform is open-source, so a wide community supports it. It uses Proof of Stake as its consensus protocol. The platform facilitates person-to-person transactions and has a powerful smart contract system.

  3. Kusama (KSM): Tagged the ‘canary network,’ or ‘wild cousin’ of Polkadot, Kusama is a sandbox-like environment for developers to test their projects (early stage) before they go live on Polkadot.

  4. Zilliqa (ZIL): It is the first public blockchain to adopt sharding. Sharding allows transactions to be processed in parallel, which results in a faster transaction rate. Zilliqa aims to address the scalability and throughput difficulties that affect various cryptocurrencies, including Bitcoin and Ethereum.

How to Stake Crypto With Guarda?

Guarda presents an exceptional opportunity for its users by running its staking pool providing the opportunity to participate in the staking process. Staking crypto can seem like a complicated task at first.

On Guarda, however, even a novice can handle the task. Guarda took it a step further by launching an in-app staking platform to make it easy for users to stake assets.

To start staking with Guarda, follow these simple steps:

  1. Create a Guarda Wallet as a new user or just log in as an existing user.
  2. Go to the ‘Earn’ page and choose one of the 12 cryptocurrencies. If you have not added the wallet to your list, do so and download the backup.
  3. Hit the ‘Stake’ button and deposit the amount you wish to stake. Make sure there are enough funds in your wallet before you continue.
  4. Deposit the amount you wish to stake and choose a validator. You can select Guarda’s validators. If you want to opt for other validators, just choose the ‘Advanced options’ to explore the others and see what works best for you.
  5. Click “Next” and confirm your details to start earning.

Is Staking Profitable and Worth It?

To explain the profitability of staking, let’s start by comparing it to a regular savings account. It is a type of account you can open at almost any bank. You can put in funds and get a low-interest rate on your savings.

For comparison, look at the annual percentage yield (APY) on a Guarda, which is much higher compared to the interest on a regular savings account. Of course, these values are subject to change, and don’t forget the volatility of cryptocurrencies, which can also cause you to lose money.

Indeed, a savings account can be considered the most reliable solution since fiat currencies are mostly stable in their value. However, you should also remember that when you delegate your funds to a bank, you put them under its management. On the other hand, with cryptocurrency staking, you manage your assets.

Often, cryptocurrency staking is the easier and more profitable option of the two in the long run, but with some additional risk. That said, savings accounts also have their merits and can be part of a diverse investment portfolio.

What Are The Pros And Cons Of Staking?

ProsCons
Rewards: Staking a cryptocurrency can increase if the network rewards its owner for contributing to transaction verification. Generally, the higher the rate, the higher the chances of creating the next block, increasing the chances of receiving a reward.Not insured: Unlike a bank deposit, rates are not insured.
Cheaper alternative: Users don’t need to buy expensive cryptocurrency mining equipment and spend huge amounts of money on electricity. PoS requires minimal computing power. A regular computer or a mobile wallet in a smartphone is enough for staking.Volatility: The volatility of cryptocurrencies can lead to loss of funds.
Blockchain support: You support blockchain cryptocurrencies when you put your cryptocurrency on their platform because these cryptocurrencies rely on participants who bid to verify transactions to run the network. 

Risks of Staking

Every understanding crypto-investor knows that in investments with cryptocurrencies. There is not only the cherished word ‘easy money’ but also many risks that are important to be aware of.

When it comes to crypto staking, several risks have come to light:

Liquidity Risk

Liquidity is the ability of an asset to be converted into money. Liquidity in cryptocurrencies is the ability of a digital currency to convert into money or another cryptocurrency.

When a cryptocurrency has very low liquidity, the market is unstable. It means that there are not many people buying and selling cryptocurrency.

Suppose cryptocurrency staking is done with coins with few transactions in the market. In that case, the risk will be quite high, and converting earnings into real money or other cryptocurrencies can be a problem.

Validator Refusal

Many people do not know this, but holders of cryptocurrencies for staking give validators the right to dispose of assets. There are already recorded cases of refusals of payments by unscrupulous validators, so this risk should be considered.

Therefore, it is very important to choose a staking platform responsibly. Transfer your funds only to trustworthy, verified validators.

Lost or Stolen

Another risk you may encounter is losing or having the wallet where you stake cryptocurrency lost or stolen.

Always remember that you should keep all the passwords you use for your wallet safe and not spread them on any platform. Also, be careful if you use a staking platform to store your passwords. The best idea is to keep your passwords in separate applications on cryptocurrency-staking platforms.

Crypto Staking Pools

Stake pools give cryptocurrency holders the right to pool their assets, increasing their chances of being selected to verify the next block of transactions on the blockchain network.

Like the mining pools used in the proof-of-work (PoW) consensus algorithm, network users provide computing resources to gain enough speed or hashing power to gain a competitive advantage over other network participants.

Each model issues a mining reward, which is distributed to all pool members.

Conclusion

Cryptocurrency staking is a good way for cryptocurrency investors to make passive profits from cryptocurrency.

It has many advantages, such as the ability of the blockchain network to scale its bandwidth and the ability for members of the network’s community to be more involved in managing the network and verifying transactions.

Despite these advantages, staking also has disadvantages that investors should be aware of, such as market, liquidity, contraction, and security risks. Nevertheless, staking is not much different from most investments.

Like any investment model, it has risks as well as positives. Therefore, you should take the time to educate yourself on staking before investing.

Disclaimer: The opinions expressed in this article are for general informational purposes only and are not intended to provide specific financial or investment advice or recommendations to any person on any investment product. This article only provides available information and opinions about cryptocurrency staking. The opinions reflected in this article are subject to change at any time.

FAQ

+ What is staking?

Staking is an alternative to mining and a more environmentally friendly way of mining cryptocurrencies. Users receive remuneration in digital currency for maintaining the network. Still, unlike mining, they do not have to purchase expensive equipment and do need to incur high energy costs.

+ How safe is staking?

When staking cryptocurrency, there are several risks you should be aware of. Potential risks include cryptocurrency price fluctuations. More volatile cryptocurrencies sometimes offer higher returns, but this comes with the risk of a decline in the price of the underlying token.

+ Can you make money by staking?

Yes, through staking, you can use your digital assets in your work and earn passive income without selling them.

+ Can you lose money with staking?

Yes, just like you can make money from staking, you can also lose money due to the main risk of staking on cryptocurrency. That is price volatility. An unfavorable change in the price of an asset can lead to a loss of funds.

+ What is the difference between staking and mining?

Mining is used in networks based on the proof-of-work algorithm, such as Bitcoin. The main difference between mining and staking is the need to use special computing equipment. On the other hand, staking requires only the coins of a given blockchain.

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