The world of digital assets is full of money-making opportunities, and, once you make acquaintance with this new thriving market of Fin-Tech, you’ll recognise this fact even more.
Crypto staking is one of those opportunities, but the ways of utilising it are numerous in number, now which one would you will clearly depend on how much time you are willing to invest in the entire process.
To put it simply, the process of staking enables you to earn rewards for staking a part of cryptocurrency holdings to vouch for the accuracy of transactions happening on an underlying exchange. It is very similar to earning dividends on your holdings in other asset markets.
So, let’s start with the basics! Crypto staking is one of the most essential technologies you should keep in mind that crypto networks use it. And, blockchains are decentralised, meaning that it doesn’t involve any middlemen like banks to validate a transaction.
There are ideally two methods to validate transitions on a blockchain network, i.e.
Proof-of-stake – revolves around staking, (eg. Ethereum, Cardano, etc.) and,
Proof-of-work – involves mining with extensive usage of computers and electricity(eg. Bitcoin, litecoin, etc.)
Staking is a way to prevent fraud and faults in a transaction. Users choose to participate in voting to accept a proposed block, thereby putting their holdings as stake. In other words, it can be taken as an incentive to play by the rules. Though, it is not always a profit you receive. At times, when the proposed block is found to have some wrong information, you’ll lose some of your stake, this process is known as slashing.
Now there are several ways to get involved in the staking process.
- Through an exchange:- This is the easy-go method if you are looking to avoid the technicalities for yourself. Using this method, the service provider will stake your crypto for you. Obviously, they’ll be charging a certain amount of fees for the same, but, this will make your work way a lot easier.
- Joining a pool:- So, if you can’t find an exchange suiting your needs, you can always join a pool operated by another individual. For this, the first requisite is to know how to use your wallet so as to connect your holdings to the validator’s pool.
Usually, to promote a better flow of decentralisation, people often delegate to validators with low voting power.
- Becoming a validator:- Well this option is only for those who are well-versed in this space. You’ll need to set up your own system, with proper computing equipment and software. You’ll also need to download the entire block history of that blockchain. It is also not quite pocket friendly, as it requires an investment of at least 32 ETH.
Using third-party staking will not have such prerequisites. Now, while all of this sounds very attractive, always keep in mind that nothing in the crypto world comes without a risk. Listed below are the risks associated with staking, this will help you clearly evaluate both sides.
- The volatility of crypto: This is a ceaseless risk, bound to affect your standing whether or not you decide to involve in the staking process. So, always keep this factor in mind.
- Lock-up periods: Till now, you already know that it is a long-term investment strategy, so indulge only if you have the time and patience, expecting short-term outcomes may not exactly help you.
- Slashing is an antonym for rewards: As mentioned earlier, Slashing is a result of you validating a transaction without cross-checking the information. This is a penalty you may have to incur, even for some non-intentional human errors.
Pro-tip:- Be one hundred percent sure of what you are doing if you are planning to stake your money outside an exchange. This will specifically require some in-depth research and technical knowledge. If not done properly, you may lose a lot of money.
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Disclaimer: Crypto products are unregulated as of this date in India. They could be highly volatile. At Unocoin, we understand that there is a need to protect consumer interests as this form of trading and investment has risks that consumers may not be aware of. To ensure that consumers who deal in crypto products are not misled, they are advised to DYOR (Do Your Own Research).