Editorial Note: We earn a commission on affiliate links on Forbes Advisor. Commissions do not influence our editors’ opinions or ratings.
With cryptocurrency, one way to make money is to sell your investment when the market price rises.
There are other ways to make money in crypto such as betting. With stake, you can put your digital assets to work and earn passive income without selling them.
In some ways, betting is similar to putting cash into a high-yield savings account. Banks lend out your deposits and you earn interest on your account balance.
In theory, the stake is not that different from the bank deposit model, but the analogy doesn’t go any further. Here’s what you need to know about crypto staking.
Featured Cryptocurrency Partner Offers
Limited time offer:
Deposit $100 and Get $10 (US Only)
Cryptocurrencies available for trading
Cryptocurrencies available for trading
Cryptocurrencies available for trading
What is staking?
Staking involves locking up crypto assets for a certain period of time to help support the operation of a blockchain. In return for staking your crypto, you earn more cryptocurrency.
Many blockchains use a proof-of-stake consensus mechanism. In this system, network participants who wish to support the blockchain by validating new transactions and adding new blocks must “stake” fixed amounts of cryptocurrency.
Staking helps ensure that only legitimate data and transactions are added to a blockchain. Participants trying to earn a chance to validate new transactions offer to lock cryptocurrency amounts to stake as a form of insurance.
If they mistakenly validate incorrect or fraudulent data, they may lose all or part of their stake as a penalty. But if they validate correct and legitimate transactions and data, they earn more crypto as a reward.
Popular cryptocurrencies Solana (SOL) and Ethereum (ETH) use staking as part of their consensus mechanisms.
Validation of proof of stake
Staking is how proof-of-stake cryptocurrencies cultivate a functioning ecosystem on their network. In general, the higher the stake, the more chances validators have to add new blocks and earn rewards.
“In PoS, validators put their assets on the line as a skin in the game that is shrunk or destroyed if they behave maliciously,” said Gritt Trakulhoon, lead crypto analyst for Titan, an investment platform. For example, trying to create a fraudulent block of transactions that did not take place.
As validators accumulate larger amounts of stake delegation from multiple holders, this proves to the network that the validator’s consensus votes are trustworthy, and their votes are therefore weighted in proportion to the amount of stake the validator has attracted.
A bet doesn’t have to consist of just one person’s chips either. For example, a holder can participate in a staking pool and staking pool operators can do all the heavy lifting to validate transactions on the blockchain.
Each blockchain has its own set of rules for validators. For example, Ethereum requires each validator to have at least 32 ETH. As of this writing, it’s around $55,000. A stake pool allows you to collaborate with others and spend less than this high amount to bet. But one thing to note is that these pools are usually built through third-party solutions.
If you own a cryptocurrency that uses a proof-of-stake blockchain, you are eligible to stake your tokens.
Staking locks your assets for staking and helps maintain the blockchain security of this network. In exchange for locking your assets and participating in network validation, validators receive rewards in this cryptocurrency called staking rewards.
Many top crypto exchanges, such as Binance.US, Coinbase and Kraken, offer stake rewards. “A more passive or novice user can simply stake their cryptos directly on the exchange for a bit more convenience, in exchange for the exchange taking some of the stake returns,” explains Trakulhoon.
You can also create a cryptocurrency wallet that supports staking.
Read more: The best betting platforms
“Each blockchain network typically has one to two official wallet apps that support staking. For example, Avalanche has the Avalanche wallet, and Cardano has the Daedalus and Yoroi wallets,” Trakulhoon points out.
If you have your tokens in one of these wallets, you can delegate how much of your wallet you want to stake. You choose between different stake pools to find a validator. They combine your tokens with others to increase your chances of generating blocks and receiving rewards.
When you select a program, it will tell you what it offers for wagering rewards.
As of July 2022, crypto exchange Kraken offers an annual percentage yield (APY) of 4% to 6% for Cardano (ADA) stakes and 4% to 7% for Ethereum 2.0 stakes. Because the Ethereum 2.0 network upgrade has not yet been completed, there are some caveats on Kraken for staking Ethereum.
Once you commit to bet crypto, you will receive the promised return on schedule. The program will pay you the profit of the staked cryptocurrency, which you can then hold as an investment, set up for stake or trade with cash and other cryptocurrencies.
The program may also have restrictions, such as tying up your stake for three months before you get your chips back.
What are the benefits of crypto staking
- Earn passive income. If you do not plan to sell your cryptocurrency tokens in the near future, staking allows you to earn passive income. Without effort, you would not have generated this income from your cryptocurrency investment.
- Easy to start. You can start betting quickly with an exchange or crypto wallet. “It’s as simple as setting up a crypto wallet, loading it with cryptos and clicking the ‘stake’ button on validators or staking pools in the wallet’s app,” explains Trakulhoon.
- Support the crypto projects you love. “Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking a portion of your funds, you make the blockchain more resistant to attacks and strengthen its ability to process transactions,” says Tanim Rasul, COO and co-founder of National Digital Asset Exchange, a cryptocurrency trading platform in Canada.
What is the risk of betting crypto
When you stake your chips, you may have to give them for weeks or months depending on the program. During this time you will not be able to withdraw or exchange your tokens.
In response to this issue, Trakulhoon notes that “for some blockchains like Ethereum, there are decentralized finance (DeFi) apps like Lido Finance and Rocket Pool that offer floating stake products. These products offer a tokenized version of staked assets, essentially making them “liquid”.
But since you’re selling on a secondary market, you need to find a willing buyer or lender. There is also no guarantee that you will be able to do so or get all your money back sooner.
Cryptocurrencies are also extremely volatile investments, with double-digit price swings common during stock market crashes. If you stake your cryptocurrency in a program that locks you in, you won’t be able to sell during a downturn. The staking platform you choose may offer lucrative annual returns, but if the price of your staked token falls, you may still suffer losses.
Many proof-of-stake networks use “slashing” to punish validators who take improper actions, destroying some of the effort they put into the network. If you bet with a dishonest validator, you may lose part of your investment because of this.
“The reduction mechanism is intended to encourage token holders to delegate their tokens only to validators they consider trustworthy or trustworthy, and not to delegate all their tokens to a single or small number of validators. validators,” says Trakulhoon.
Should you bet crypto?
Staking is a good option for investors who are interested in generating returns on their long-term investments, who don’t care about short-term price fluctuations. If you need to get your money back in the short term before the wagering period ends, you should avoid locking it up for wagering.
Rasul advises you to carefully review the terms of the wagering period to see how long it lasts and how long it will take to get your money back when you decide to withdraw.
He recommends working only with companies with a positive reputation and high security standards.
If interest rates seem too high to be true, you should proceed with caution, experts say.
Finally, betting, like any cryptocurrency investment, involves a high risk of loss. Only bet money that you can afford to lose.