What is Cryptocurrency staking?
Today, we are going to discuss What is Cryptocurrency Staking: One way to earn passive income. how you can make passive income from crypto staking.
The U.S. SEC wants to ban staking. Let’s refresh our knowledge of this process and think about what the regulator can and cannot ban
Staking is an alternative to mining in cryptocurrencies on the Proof-of-Stake algorithm, where a certain number of coins are blocked in order to qualify to participate in transaction verification. As with mining, the blockchain relies on rewards in network tokens to keep it running
In POS cryptocurrencies, validators are responsible for verifying transactions and creating new blocks in the blockchain by placing their coins on the stack. These can be either the validator’s own coins or funds received from other users.
For example, to create an Ethereum stack, a minimum of 32 ETH must be blocked. This amount may be too high or the user doesn’t want to set up a node and check transactions, i.e. be a full-fledged validator. In that case, you can transfer your ETH to another validator, who will split the reward with you. And the transfer process itself can take place through an intermediary, such as a cryptocurrency exchange or DeFi service.
In this case, staking actually turns into a form of passive income, where you transfer cryptocurrency to a third party and get a percentage for it. It works just like a deposit in a bank
The SEC wants to ban staking because from their point of view it is an illegal financial service that no one has been licensed for. Banks have a license for deposits, but crypto exchanges don’t have a license for staking
Based on this logic, the regulator could require all centralized crypto exchanges to stop providing staking services until such activities are legally regulated.
Banning staking on DeFi is much more difficult, but it is theoretically possible. The practice of regulating DEX exchanges exists and has been used. Authorities simply prosecute the developer of the DeFi protocol, and he either goes to jail or shuts down his service.
But what the regulator can’t prohibit is to engage in cryptocurrency stacking themselves, directly interacting with the blockchain.
How you can stake cryptocurrency
Using an exchange
One option is to use an online service to stake your tokens for you. Some popular cryptocurrency exchanges offer staking in exchange for a commission, and they allow you to use fiat currency to buy crypto.
There are many exchanges in the market which offer staking like gemini, Binance and also the Big exchange like Kraken also gonna start offering crypto staking in FEB 2023.
Finally, it’s worth remembering that third-party crypto staking programs require you to keep your crypto online on their platform. That can leave you vulnerable to potential losses in the event of a crypto exchange failure such as the FTX collapse.
Joining a pool
If you don’t want to trust an exchange to make your staking decisions for you — or if you can’t find anyone backing the token you want to stake — you can join what’s called a “staking pool” managed by others.
To do this, you need to know how to use a crypto wallet to connect your tokens to a pool of validators.
Many proof-of-stake blockchain official websites include information on how to research validators, including links to details on how they work.
Omkar Bhat, data engineering lead at Boston-based analytics firm Flipside Crypto, suggests looking carefully at a potential validator’s track record.
Some information that is publicly available can help you see if a pool operator has ever been penalized for mistakes or wrongdoing, and some have policies in place to protect those who surrender tokens. Other details you may see include the level of fees or commissions.
Bhatt says it’s fine to choose an established pool, though you definitely don’t want to choose the biggest one. Blockchain is supposed to be decentralized, so there is an argument to prevent any one group from amassing too much influence.
Becoming a validator
Setting up your own staking infrastructure can be complex. It requires appropriate computing equipment and software and downloading a copy of the entire transaction history of the blockchain. It can also have a high cost of entry.
On the Ethereum network, for example, you need to start with at least 32 ETH, which would be worth about $48,000 on September 15, 2022. Staking through a pool or through an online service does not carry such requirements.
What kind of returns does staking offers?
Stacking may not be for everyone. There are a few questions to ask before deciding whether to stake your crypto.
Do you believe in the project?
Ultimately, deciding to stake your cryptocurrency may come down to whether you feel confident that it is a good long-term investment. If you believe in the value of the Ethereum network, for example, day-to-day changes in price may not affect your willingness to sell. Staking is one thing you can do to get short-term value from a crypto investment.
Will you need access to your staked crypto?
Crypto staking can involve committing your assets for a certain period of time during which you cannot sell or trade them. If you think you can move your crypto on short notice, make sure you look at the terms carefully before staking it.It is important to remember that crypto is a volatile asset. While crypto staking can provide a measure of predictability in investment returns, if the market value of your cryptocurrency drops by 20% during the time you’re staking it, for example, the rewards you’re reaping won’t look as attractive.
Have you explored other forms of passive income?
Crypto staking is a way to earn passive income, which requires no daily effort after the initial investment. And while staking may be a good choice for some cryptocurrency owners, there are many other ways to generate passive income. Some of those options are also worth paying attention to.Other common forms of passive income include dividends from stock holdings, interest on bonds, and real estate income. There are also non-staking options for earning your crypto, including lending programs and decentralized finance (DeFi) applications.
