BEFORE YOU STAKE YOUR CRYPTO FOR PASSIVE INCOME, READ THIS!
Staking is one more way to earn passive income from crypto. But, here's what you must know first
The staking economy in the crypto industry continues to grow stronger and stronger, with various exchanges offering staking services for their customers. Unsurprisingly, there seems to be no shortage of customers.
If you’re one of those struggling to understand what staking entails, all of that is about to change after now. In today’s newsletter, you’ll understand how staking works as well as the pros and cons you should consider before making your decision.
What is Staking?
Staking simply involves locking up an amount of a given cryptocurrency in order to improve the Blockchain efficacy. This is done in return for rewards. The locking up of funds is where it derives the name – staking, indicating that the participants must first put up a stake.
Blockchains operating a Proof-of-Stake consensus allows anyone to participate in staking. In return for this, participants receive a share of the block rewards.
Operators of a blockchain network can practice staking in two ways:
One, as a consensus mechanism which is known as Proof-of-stake (PoS). This model contradicts the Proof-of-Work (PoW) mechanism used by Bitcoin which involves solving complex mathematical problems using computational power. With PoS, Blockchain network operators also known as validators are required to stake a minimum required amount of funds which permits a new block to be added to the ledger.
These Blockchain validators receive block rewards for their efforts, similarly to where miners receive block rewards (bitcoin) for their efforts on the Bitcoin network.
It’s worthy to note that Ethereum has been working on Ethereum 2.0, an effort to move from their current “Proof-of-Work” to a “Proof-of-Stake” consensus mechanism. This will allow network participants to participate in staking.
The second option is through Masternodes –specialized nodes that allow a blockchain network to introduce new features into its architecture. The was first experienced in the Dash ecosystem, where users were required to put up 1000 Dash tokens to run a master node, thereby earning greater rewards.
Since Dash, we’ve seen a lot of Blockchains implement masternodes.
Proof-of-Stake is more beneficial to Blockchain networks in that it saves energy. Unlike the Proof-of-Work consensus (eg. Bitcoin) which requires too much computational power to validate blocks, Proof-of-Stake networks only require a small percentage of that energy.
Pros and Cons of Staking for the User
Pros
Staking allows individuals to generate passive profit from funds that would have probably been sitting dormant. So, you typically get paid to HODL your crypto. This is a safe way to earn from crypto without actively trading them.
Cons
Staking rewards are often paid in the currency of the said Blockchain network, and users are expected to lock up the funds for a certain period. This simply means that the funds are subject to market volatility and they won’t be able to pull out and cut losses should the market crash heavily.
If the value of the asset reduces over the timeframe, even the rewards may not be enough to cover the losses from the price bleed.
Also, for users who participate in a staking pool (which usually has a much lower entry barrier), it is important to note that your cryptocurrency will be in the custody of someone else (for example an exchange). This means it’s not totally safe, no matter how you look at it. After all, you don’t have the private keys.
The ROI is not the only thing to consider in picking a stakable coin. You should also consider the market cap and trading volume. In a case where the ROI is high, there’s no way to cash in without crashing the prices if the trading volume and market cap are low.
As a staking participant, you’d really want the crypto you’re staking to rise in value or at least maintain the same value. Anything outside this means you’ll be in loss because the rewards earned may not be high enough to compensate for the price drop.
So far, we’ve been able to establish what staking is all about, the pros and cons for you as a cryptocurrency user. It is obvious that there are risks which you must consider. However, if you manage to select a quality token with massive upside potential, staking could be a great way to earn passive income from your holdings.
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