What is staking in crypto?

Many people unfamiliar with the crypto space believe the only way to make money through investing in crypto is to buy low, wait for the market to hit a bull run, and sell high. But in reality, crypto offers another way to make money, through staking. Staking in crypto is often compared to traditional bank deposits, where banks use the money clients have in their accounts to use and lend out, allowing their clients to earn interest. Staking is based on the same principles, allowing investors to make a passive income while their funds get to work on the blockchain. But, as with anything in this emerging digital sphere, there are advantages and risks to staking your crypto funds. What’s more, not all cryptocurrencies support staking, so it is important to understand the ins and outs of this model if it is something you wish to seriously consider. 

This article will help answer frequently asked questions on crypto staking, what it involves, how to go about it, and the advantages and risks involved. As always, if you have more questions by the end, just get in touch with our team via www.limitlex.com. 

How does crypto staking work?

Crypto staking works by locking up cryptocurrency assets to support blockchain operations, particularly those involving a “Proof of Stake” (PoS) consensus mechanism. The PoS method is a way of validating transactions, adding new blocks and securing the network, using crypto as a form of collateral, as opposed to other methods that use computational power, such as “Proof of Work”, or PoS models, such as Bitcoin. 

The staking process helps maintain the integrity of the blockchain, as users, known as validators, risk losing their staked assets if they validate fraudulent transactions. However, when they validate legitimate transactions correctly, they earn additional crypto assets as a reward. Some popular networks that use staking to validate transactions include Solana and Ethereum. Any crypto user who owns a crypto whose network employs staking is able to stake their tokens, helping to maintain network security. 

The advantages of staking crypto

One of the main advantages of staking crypto is the opportunity to make a passive income off your crypto assets. Much like having FIAT money saved in a savings account that accrues interest, crypto staking can secure a steady stream of income with no need to get involved in active trading. Crypto staking is also a way to contribute to securing the network’s blockchain and making it more efficient for other users. 

“Proof of Stake” systems often disincentivize malicious actors from trying to execute fraudulent transactions, as they would require a significant investment to carry out an attack. For energy-conscious users, crypto staking is also more environmentally friendly that other validation systems such as “Proof of Work”, employed by Bitcoin and other blockchains. Given that staking does not require as much computational power, it is much less energy intensive and therefore a more sustainable way of maintaining the network and blockchain.

The risks of crypto staking

Many crypto users acquire crypto assets for investment or trading purposes. Given the volatility of the crypto market, if timed correctly, crypto trading can lead to significant gains, but the losses can also be devastating. While the risks of crypto staking are not as high, the market’s volatility can still impact gains. For example, if the value of the staked token falls, the potential losses can outweigh any staking rewards earned. What’s more, misconduct by validators (such as dishonesty or mistakes) can trigger penalties such as “slashing,” where part of the staked assets is permanently lost. 

The main disadvantage that often puts users off staking is that many staking programs require their tokens to be locked up for a prolonged period of time. During this time, assets cannot be withdrawn, spent, traded, or sold, meaning users could miss out on market surges and the chance to sell their assets for gains. On the other hand, this also means that in a market downturn, users are unable to sell their assets to reduce the impact of a loss. This is an important consideration to make before committing to any staking system and can depend on users’ short- and long-term goals. 

Crypto staking presents a unique opportunity for investors to earn a passive income while supporting the overall workings, security and efficiency of the network and blockchain they have invested in. However, as with anything in the volatile crypto space, it is essential that users understand the risks involved in locking up their assets over a prolonged period of time. It is highly recommended to conduct in-depth research to find a strategy that aligns with your goals. 

For more information on investments in the crypto space, how to use Limitlex, or to open a trading account with us, visit www.limitlex.com.