Since “Staking” is still a relatively new concept in the world of cryptocurrency let’s go start with something that is familiar… dividends. Dividends are payments made by companies to their shareholders, usually in the form of cash or additional shares, as a distribution of profits or earnings from the company. Now, it is important to note that you are paid dividends based on the amount you have invested rather than the value of shares you own. For example, if I’m invested in a stock with a 3% dividend yield then I will make 3% of the money I’ve invested into the stock per year. Often people opt to re-invest their dividends so there is a compounding interest that builds for long-term investments. “Staking” and dividends share similarities but are far from the same thing. In this article, we’re going to explore the different aspects of “Staking”. 

What is Staking? 

For those who do not know what “Staking” we’ll walk before running and hit on the basics. Staking is a process in which you lock up your cryptocurrency in order to participate in the validation of transactions on a blockchain network. In return for staking your cryptocurrency, you earn rewards in the form of more cryptocurrency. Basically, staking is a way to earn passive income from your cryptocurrency holdings. It is also a way to help secure the blockchain network and make it more resistant to attacks. Not all cryptocurrencies can be staked so if you just saw “passive income” and bought a ton of SHIB then sorry not sorry… keep reading. Only cryptocurrencies that use a proof-of-stake (PoS) consensus mechanism can be staked. PoS is an alternative to the proof-of-work (PoW) consensus mechanism that is used by Bitcoin and other major cryptocurrencies (ETH, SOL, ADA, etc). 

Should you Stake your Crypto? 

You are your own person and therefore should make your own decisions. The intention of this article is not to lead you to or away from staking but to educate you on the risks and rewards that come with staking. 

Let’s start with the risks shall we? When trying to understand the risks of “Staking” it’s imperative to know that you can lose staked coins. Yes, lose them completely they could be gone. It sounds scary but it makes more sense when looking at the reasons you can lose staked coins. 

Staking Pool Hacks: If the staking pool you are using is hacked, there is a risk that your cryptocurrency could be stolen. This is because the hackers would have access to the pool’s private keys, which they could use to transfer your cryptocurrency out of the pool. 

Slashing: Some PoS blockchains impose penalties called “slashing” on validators who fail to validate transactions correctly or who are offline for extended periods of time. If you are slashed, you could lose a portion of your staked cryptocurrency. 

Market Volatility: The price of your staked cryptocurrency could go down, which would mean that you lose money even if you don’t get slashed or your staking pool is hacked. This is because you are not able to sell your staked cryptocurrency until you unstake it, which can take a few days or even weeks. 

Technical Difficulties: There is always the risk of technical problems with the staking protocol or the staking pool. This could cause you to lose your staked cryptocurrency or prevent you from un-staking it when you want to. 

It is commonly said that there is no rewards with out risks and in the case of staking that is true. Now, that we understand the risks we can weigh the rewards as staking can be lucrative with the right elements (elements being the coins, platforms, etc. but we’ll get to that later). 

Earn passive income: Staking is a way to earn passive income from your cryptocurrency holdings. You are rewarded with cryptocurrency for participating in the validation of transactions on the blockchain network. The amount of cryptocurrency you earn will vary depending on the cryptocurrency you are staking, the amount of cryptocurrency you are staking, and the staking pool or validator you are using. 

Support the network: Staking helps to secure the blockchain network and make it more resistant to attacks. When you stake your cryptocurrency, you are essentially lending your cryptocurrency to the network to help it function. This helps to ensure that the network is always available and that transactions are processed quickly and securely. 

Increase the value of your cryptocurrency: Staking can help to increase the value of your cryptocurrency. This is because staking creates a demand for the cryptocurrency, as validators need to stake cryptocurrency in order to participate in the network. Additionally, staking can help to reduce the supply of cryptocurrency, as validators are rewarded with cryptocurrency for their participation in the network. This can lead to an increase in the price of the cryptocurrency.