Handling cryptocurrency is becoming more challenging as events unfold and the market changes. Bitcoin halvings, bull markets and BTC ETF developments contributed to what the crypto market is today ― a decentralized and censorship-free ecosystem.
Being abundant in income possibilities, the crypto environment offers various ways of making money and providing safety. Whether you validate transactions, develop decentralized applications or buy Bitcoin with debit card for the long term, you help maintain the crypto market.
Among these methods, crypto staking may be the most worthwhile and aiding for the market. The Ethereum blockchain helped improve this activity, especially after the Merge update, when liquidity increased. However, it also exposed users to several challenges, such as centralization and the decrease of Ether’s net supply.
Overall, staking is beneficial for those who want to get an idea of how the crypto market works. So, let’s analyze it.
How does crypto staking happen?
Crypto staking is, in short, a simple way to create passive income with cryptocurrency. Staking crypto involves locking up coins or not transacting or trading them with the purpose of blockchain participation and safety. When you stake for long, you receive rewards based on a percentage yield.
Staking also contributes to safety when you choose to stake your own cryptocurrency. Usually, only some cryptocurrencies can be staked because they use the PoS (proof-of-stake) consensus mechanism. Users who want to boost their income can join staking pools, which sometimes require a minimum stake to be able to contribute.
Why is staking profitable?
Besides helping maintain networks safe, staking can be profitable from many points of view. First, it’s more energy-efficient compared to mining. Hence, miners on Bitcoin might switch tostaking on Ethereum for greater returns and less investment in expensive hardware.
At the same time, staking ensures a passive income because you can stake the coins for as much as possible, in which period their value will increase. Staking can also be considered as a long-term strategy to build a strong portfolio.
Moreover, staking might provide users with the feeling of serviceability, as they don’t need to burden validators with another transaction. Therefore, communities are becoming stronger and networks safer.
Why is staking risky?
Like most crypto-related activities, staking has its own drawbacks, given its newness. First, volatility can play a negative part in staking because an asset’s value can also decrease considerably when the market goes down.
At the same time, if you join a staking pool, you’re required to split the total return amount and pay additional fees for using this service, so you may need to increase your involvement to create stable passive income.
One of the most worrying aspects about staking is the centralization risks. The Ethereum network is an understandable example of how a few pools have multiplied and might have influenced the total staking power. That’s because getting into Ether staking can be expensive, so users need to use intermediaries’ services, which allow them to split the costs. However, some of these exchange channels have expanded more than others, exposing the network to security issues and centralization.
What are the best cryptocurrencies to stake?
While Bitcoin is mined to ensure safety and productivity, the rest of cryptocurrencies leverage staking as a better alternative because it’s more sustainable and hassle-free. Besides the first condition of using a PoS consensus, here’s what to consider before choosing what token to stake:
- The annual percentage yield offered, which ensures the potential rewards;
- The market value and growth, because it gives an insight into price appreciation;
- The tax reporting requirements, since they’re essential;
Given these perspectives, here are some of the best cryptocurrencies for staking:
- Cardano offers flexible staking rewards, has a native token with a massive market capitalization and is a credible option for investors;
- Ethereum provides considerable staking rewards, has improved its scalability, and you can withdraw the Ether you stake if you need some cash;
- Tether ensures stability and less market volatility exposure as it’s pegged to the US dollar and also has a massive market capitalization;
Are there any alternatives to staking?
If you don’t want to deal with staking penalties and forceful withdrawal, you may want to look for alternatives that are easier to operate. For instance, liquid staking allows users to receive any other token that the one staked to be able to use however they like. It’s the case of Ethereum, where liquid staking provides you tokens like stETH that can be traded with any other coin.
Crypto lending is also doable because you deposit your tokens into liquidity pools, and users interested can borrow against it, which ensures you with a fee on the amount borrowed. Providing liquidity to decentralized exchanges works on similar aspects, but you might need to respect a minimum deposit period.
Staking vs Mining
Mining was the first method employed by the Bitcoin blockchain to add more blocks to the network and maintain safety. However, it became problematic in time, affected by a series of factors, from the price of the mining hardware to the decreasing miners’ rewards after each having. Since Bitcoin mining still works with the PoW consensus mechanism, it cannot evolve.
Although both staking and mining are crucial to networks and reward their workers, their differences are considerable. First, mining is energy-intensive, while staking isn’t. Miners need to solve complex cryptographic puzzles to be rewarded, while stakers only have to put their tokens into a pool. Moreover, the different consensus mechanisms will influence the blockchain’s profitability and productivity, so we can say that staking is significantly better than mining. It’s easier to employ and handle and offers better rewards without being affected by the halving event.
Conclusion
Cryptocurrency staking is a method of earning rewards from staking your tokens on PoS-based networks. Staking involves putting your coins to work while not leveraging them for transactions and contributing to the safety of your network. It’s a highly profitable way of creating passive income with crypto and is also safe since you’re not exposing yourself to massive changes, like in the case of mining. Yet, staking can be the subject of centralization.
