Crypto staking is a term that is commonly thrown around among cryptocurrency investors. If you are new to cryptocurrencies, you might not be familiar with the term, but don’t worry. We will examine the activity and enumerate all the good and not-so-good points. Keep reading to learn more about crypto staking.
Crypto staking is the act of staking your crypto tokens to validate transactions on the blockchain. This improves the security and integrity of the platform, and you get rewarded in return. Each transaction on the blockchain needs to be verified by the nodes, to create a ledger. Since no central authority is involved in cryptocurrency transactions, it is up to the users to maintain the ledger. It is for this reason that crypto staking comes into the picture.
People pledge their tokens to the platform, showing a willingness to verify the transactions. The protocol chooses only one person to verify the transaction, who records it on the blockchain. But irrespective of who verifies the data, the protocol rewards all the willing stakers because they contribute to the quality of the blockchain.
If you are looking for crypto to stake, you must understand that not all cryptocurrencies are available for staking. Only tokens/coins that use a Proof-of-Stake mechanism to reach consensus on the network allow people to stake their tokens.
Suppose your token uses other consensus mechanisms like Proof-of-Work or Proof-of-Capacity. In that case, you cannot stake your tokens. If you have decided to stake your cryptocurrencies, it is essential to know the type of mechanism your token uses for attaining consensus.
Is staking crypto worth it?
Here are some of the benefits of staking crypto, which is what has given this activity such a boom:
Crypto staking has gained so many enthusiasts because it acts as a great source of passive income. Once you lock in your tokens on the platform, you don’t lose them. Instead, you get rewarded with more tokens for taking it upon yourself to improve the platform. It is similar to keeping money in a bank: you earn interest because the bank can use it to create more money.
People are slowly warming up to the idea of cryptocurrencies because of the security that it promises. Even though it is easy to duplicate data digitally, blockchain technology ends that. When you stake and choose to validate the transactions, you further improve the platform’s security.
Uses crypto tokens
Not all countries and/or financial institutions recognize cryptocurrencies. This poses a problem to the holders because they must use their tokens. This is the reason that crypto casinos are on the rise. For example, when you wager BTC at Сrypto casinos, you get special bonuses for using Bitcoin for your transactions.
Moreover, your rewards are credited to your account through cryptocurrencies, ensuring your asset remains active. Crypto gambling is becoming popular among the masses due to the great offers that casinos are putting forward. But staking allows you to use your tokens without having to spend them.
Is staking crypto safe?
Reading the benefits stated above, you are probably thinking of staking your tokens the first chance you get. But all that glitters is not gold, so you should check it up close. Staking might have great advantages, but it is necessary to consider all the aspects before deeming it safe.
Technically speaking, staking is safe, because blockchain ensures that there is no security leak. Your data and your tokens are completely secure, so you can rest assured that your tokens will find their way back to you.
But concerns arise when you realize the market risk of staking crypto will not disappear. The high volatility of cryptocurrencies has deterred many people from trying out their hands at these tokens. It might also discourage people from staking because you might stake your tokens at a higher value. However, the value has reduced by the time you receive your reward. You must bear the loss and hope the value doesn’t dip further.
If you want to stake your crypto tokens, it would be best to look for crypto platforms, because it is the easiest way. The best crypto wallets for staking include Binance, ZenGo, Gemini, Coinbase, and Kraken, among many others.
Consider joining a staking pool, where multiple validators stake their tokens to a single node. Since there are more people, the number of tokens for staking would be higher. As a result, the rewards would be higher as well. The rewards are then shared proportionately among the validators.
Best cryptocurrencies to stake in 2023
As mentioned earlier, not all cryptocurrencies are available for staking. Your token needs to use a PoS mechanism for verification if you want to stake it. Here are some of the best cryptocurrencies which you can stake in 2023:
Tether is one of the largest cryptocurrencies in the market. It has a large market volume, which substantially reduces the liquidity risk. Returns from staking Tether are known to go as high as 12.3%. There are no lockup periods either, which means you can ‘unstake’ your coins whenever you want.
Ethereum initially used the Proof-of-Work mechanism, which meant it was impossible to stake the tokens. But recently, it merged its system to Proof-of-Stake, which would drastically reduce its energy consumption. Staking Ethereum results in an annual yield of 5% to 20%, which any other token can hardly match.
Binance, along with being one of the largest crypto exchange platforms in the world, is also a popular crypto token that you can stake. Staking crypto Binance offers an average annual yield of 6% to 9%, but if you are lucky, the rates can go as high as 30%. The lockup period is only seven days; you can unstake your tokens quickly.
Solana is a popular token among cryptocurrency investors owing to the minimal transaction fees and quick transactions. The average annual yield is between 7% to 11%. Solana has a very short reward period of 2-3 days, which is great news for people who wish to claim rewards immediately.
Risks of crypto staking
We already tried to answer the question you had in your mind: “Is staking crypto safe?” But in this section, we will discuss, in detail, the risks people need to bear if they are involved in crypto staking.
It is no secret that cryptocurrencies are highly volatile assets. While it might appeal to many people owing to the possible high returns, paying attention to the market risk is necessary. If the token’s value rises, great for you, and you earn a profit. But if the token’s value falls when you stake them, you must take the hit and come to terms with the loss.
Liquidity is the feature of an asset to be converted into cash as quickly as possible. Cryptocurrencies are highly liquid, as they can be exchanged for fiat currencies at most crypto exchanges. But when you stake your tokens, you cannot liquidate them according to your needs. Thus, you lose liquidity and have to bear the liquidity risk.
If you are staking crypto with a fixed lockup period, you cannot access your tokens for that time. This means that even if you forecast a fall in the token’s value, you cannot sell them. Ultimately you would be at a disadvantage if there is a fixed lockup period for staking.
As someone validating the transactions on the blockchain, you would have to bear a heavy responsibility. You need to be online all the time and verify each transaction properly. If you make a mistake, you will have to pay the penalty. Running your device 24/7 to keep the node online means you must also bear the electricity charges.
Crypto staking tax
While it might not be a risk, people must pay taxes on their staking returns. Each region has different rules, so you must check whether you have any other charges or just the tax on your returns.
These are some risks people have to bear if they are involved in crypto staking. People might go on and on about how safe staking crypto is. However, overlooking the associated risks will not be a smart idea.
Like everything else in the world, crypto staking has advantages and disadvantages. So that you do not get a rosy idea of crypto staking, we have listed the good and the bad. While it is true that staking can be a way to passive income, you cannot ignore the fact that there are security and financial risks associated with staking.
A safe way to deal with the risks of crypto staking would be to use a renowned crypto wallet. Numerous crypto wallets and platforms promise users a more accessible and secure way to stake their crypto tokens. Ultimately, it drills down to whether you trust the project to succeed and are willing to take risks to enjoy the returns.
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