How crypto staking works: Is staking crypto worth it?

Can staking crypto generate passive income? If so, how do you do it?


Buying, selling and trading cryptocurrencies are all popular activities in the crypto space. But there are other methods of making money from crypto. One way to make a profit is through staking, a system which, theoretically, can earn crypto holders money without them having to do anything. But is crypto staking worth it? How do you make money staking crypto? Can you make a decent passive income from staking crypto? 

Crypto staking explained

Staking, to put it simply, is an alternative to mining. Traditional crypto mining involves making use of a significant amount of computing resources to solve increasingly complex mathematical equations which add new blocks to the blockchain. In return for doing this, the organisation (if such a word is appropriate for a process based on decentralisation) rewards the miners with payment in crypto coins which are unlocked, or mined, in the process.  In theory, everyone wins. The blockchain gets bigger, new crypto coins are released into the ecosystem and miners get paid. 

There has, however, been a reaction against traditional mining. One of the big issues is that, because mining requires considerable computer power to solve some pretty complex equations, it uses a lot of computing power, which means it needs a lot of electricity, which means, ultimately, it takes a toll on the environment. The carbon footprint of some cryptocurrencies which use mining, also known as “proof of work”, to raise new coins is considerable. It has been reported that bitcoin mining uses 110 terrawatt hours of electricity a year, which puts it on a par with countries such as Malaysia and Sweden. 

There is thus a desire among some crypto enthusiasts for a method of making money which is less ecologically unsound. The idea is that, if cryptocurrency can provide benefits for people, it should not at the same time do damage to the planet. There are several alternatives to “traditional” proof-of-work crypto. The one we are going to talk about here  is proof of stake. 

It is not just the matter of being ecologically more sound that might make a crypto developer choose to make use of proof of stake. There is also the matter of efficiency. Bitcoin uses proof-of-work, partly for historic reasons (that was how it was designed) and partly because the chain itself is fairly straightforward. For other blockchains, though, as the processes become more complex, proof-of-work becomes very inefficient. The system gets clogged up, meaning transactions are slower and, worse  for customers, fees get higher.

This means that something which can use less computing power and keep things moving along quicker is desired. This is where proof-of-stake can make a difference. 

Proof-of-stake means, at least in theory, that crypto investors can mint new coins without having to overuse computing power. This is good for the environment and, perhaps as important, it means the users will not have such a high electricity bill. How it works is that people can buy or trade in new crypto currency and the blockchain or, in many cases, the blockchain-based network will give them newly minted coins or tokens based on how much of the particular crypto they hold. The crypto will need to be held in a particular wallet but that means that, at some unspecified point, the holders will be able to add a block to the blockchain and reap the rewards. 

Staking in crypto is also, again in theory, quite a bit faster than mining, meaning there are fewer roadblocks and bottlenecks and, perhaps more importantly, transactions are cheaper, too.

The benefits of crypto staking

Crypto staking
Crypto staking is similar to leaving your money in an interest-paying bank account - Photo:

What, though, are the other benefits? People who hold proof-of-stake cryptocurrencies are able to add blocks to the blockchain, based on how much they hold, and get paid out that way. However, there is another way in which staking can make crypto holders money.

As well as getting rewards for adding blocks to the blockchain, people who hold certain sorts of proof-of -stake cryptocurrencies can, in some cases, earn interest. This means, at least in theory, that in some cases you can make money in crypto without having to actually do anything. The interest accrued to the holdings in your wallet should, again theoretically, keep coming in. 

You can think of holding crypto in your wallet as being the similar to holding money in a bank account that pays interest. Because the bank uses its holdings, including the money in your account, to loan out to others, and invest in ventures that bring in returns, that means that you can receive a payment as interest on the money you leave in your bank account. Likewise, because cryptocurrencies might well use their holdings, that is, the crypto coins and tokens involved in their ecosystem, for other things, such as loans and investments, then, in some cases, you can reap the rewards of them making loans and investments using the cryptocurrency you left in the system. 

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There are some websites which offer generalised savings accounts that allow you to claim interest on your holdings. Bear in mind that, while these sites do not necessarily involve staking as such, the effect is the same. As a rule of thumb, these sites tend to pay higher interest on stablecoins than they do on more traditional cryptos. 

Is staking crypto worth it?

There are many cases in crypto when, in return for delegating crypto to users who make decisions about a network’s future, people will get rewards for doing so. Again, this is all part of the interest-generating potential of staking. 

So, why might someone decide to stake their crypto, rather than try to raise money by selling or trading it? Well, you might believe that you can get a better return on your investment than you would letting your crypto hang around in a wallet until the market moves up enough that you are able to sell or exchange your coins for a profit. You might also decide that interest-based staking is safer than the high-action world of crypto trading. It might be that you want to make a passive income by staking crypto that could supplement the money you make from a regular job, thus, at least in theory, boosting your cash flow without having to do terribly much. 

Some protocols issue governance tokens, which allow you to have your say in how the network is run. There is also the opportunity to link up with other stakers to create a staking pool, which allows people to pool their staked crypto and share in the rewards, if and when they are chosen to validate blocks on the blockchain. 

Anothr process is called cold-staking, which involves staked coins being kept in an offline wallet. This only really works when there is a seriously significant amount of virtual cash involved, but it does have the advantage of being much more secure than keeping your fortume in an online wallet. As with all forms of passive income, it seems if you want to make a passive income staking crypto, then you need to have a substantial sum of cryptocurrency in the first place.

Concerns over crypto staking

On the other hand, there are reasons not to stake your crypto. Cryptocurrencies are highly volatile and it is not that uncommon for the market to crash. You might get a return of 10% from your staking but that does not mean anything if the crypto you have staked falls by 25%. You will lose because once you have staked, that money is locked in. 

Second, the protocol you invest in might fail. This will see you losing your assets, so be careful, do your own research and never invest more than you can afford to lose.

Third, you have to keep your eyes open and be sure that the scheme you are investing in is not a scam. Be careful and remember that if something sounds like it is too good to be true, it probably is. 

In all, staking in crypto can be profitable but there is plenty of opportunity to lose your money. You will have to be very careful and research what you want to stake in, and how much you want to stake. You will need to keep in mind that the price of any cryptocurrency can fall as well as rise, which could mean you get out of pocket. Most importantly, though, you must never invest more money than you can afford to lose. So, is crypto staking worth it? Well, the world of cryptocurrency can be confusing, so you will have to use some level of caution. 


What is the risk of staking crypto?

The risk of staking crypto, like most things involving cryptocurrency, is that you can get back less than what you put in. In some cases, you might end up staking in a coin whose value shrivels away and it becomes a dead coin. As always, if you are going to stake crypto, never invest more money than you can afford to lose.

Is staking crypto safe?

Because crypto markets can be very volatile, it is wrong to say that crypto staking is safe. You can make a loss because when you stake, you have to lock your crypto in for a certain period of time. This means you cannot take your money out if the market undergoes a downturn. If you want to stake, you need to be aware of the risks and do your own research.

How much can you earn staking crypto?

This all depends on how much you stake in the first place and how well the crypto performs in the period between you locking your crypto in and taking it out. There is no specific answer and we do need to remind you that, because prices can go down as well as up, you could end up making a 10% profit on a coin or token which drops 50% in value in the time you have staked for. 

Further reading

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