Why Is Staking Important?

Cryptocurrencies have several activities that enable investors to make money actively or passively. One of such activities is staking, which only happens in Proof-of-Stake cryptocurrency platforms.

So, when someone asks, why is staking important? The answer is that staking plays a significant role in many PoS cryptos and also provides a means of increasing ROI in crypto.

This article will expose what staking is about and how it works. Also, you will learn the benefits and risks of staking and some best crypto coins that you can stake. Keep reading!

What Is Cryptocurrency Staking?

Cryptocurrency staking is the process of setting aside or holding some tokens for a certain period in a wallet. This will facilitate a blockchain network to confirm and validate crypto transactions seamlessly. Through the staking process, the user maintains the security and operability of the network and will earn some crypto rewards in return. So, you can see staking as a means of generating passive income in cryptocurrency.

Staking is similar to the traditional deposits in banks. However, by keeping his money in his account, he supports the bank’s total capital base and will earn some interest over some time.

There is a variation in users’ rewards for staking their coins based on the networks using the staking pools for cryptocurrencies. Also, some factors to the staking rewards are the demand and supply dynamics for the crypto tokens used. This means that some cryptocurrencies will give holders higher earning rates than others for staking their coins.

How Does Staking Works?

Before you consider staking your crypto coins, you must ensure that they allow staking. Not all cryptocurrency tokens are available to stake. The cryptocurrency must be running on Proof-of-Stake (PoS) like Ethereum for you to stake its coins. It is not possible on a Proof-of-Work (PoW) network such as Bitcoin. So, while you can stake ETH, you can’t for BTC.

A Proof-of-Stake network uses the staking process to add a new transaction or block on its blockchain; a Proof-of-Work network uses mining and solutions to its mathematical puzzles.

• The Staking Process

The staking process begins with the user acquiring the protocol’s tokens he wants to stake. Every PoS protocol has its staking instruments for users to follow. Then, he will need to lock his holdings using the network’s instructions. Among the stakers on its platform, the network will select validators to confirm its blocks of transactions. Staking more tokens allows becoming a blockchain validator for the protocol and increases your interest-earning.

Adding a block to the blockchain results in the minting of a new cryptocurrency within the network. The crypto tokens are set aside and later used to incentivize the validators. Note that the usual ranking of nodes depends on the number of crypto coins. As the number of staked tokens increases, there will also be an increase in the number of transactions that a specific node receives for validation.

Hence, nodes with a higher number of coins get higher compensations. The networks have two means of rewarding the stakers. They may use the same cryptocurrency for staking for the stakers’ rewards or a completely different digital asset.

• Staking Through Crypto Exchanges

Besides staking from your private wallet, you can utilize the services of crypto exchanges to stake your holdings. These exchanges have some staking pools attached to their platform as part of their features. So, their customers will not have to move their funds to a private wallet before they could stake. In addition, such exchanges facilitate the compensations from a given network through their customers’ stakings. Hence, they may top the number of staked crypto tokens for a specific period.

• Staking Could be Rigid or Flexible

The staking of crypto tokens could either be rigid or flexible, depending on the terms for the staking.

A staking process is considered rigid if it strictly follows a given period. This means the holder can’t withdraw his tokens until the fixed time is complete. Going contrary to the terms attracts a penalty which could be a total or partial forfeiting of his staking interest. However, with rigid staking, the customer can earn higher interest rates.

Conversely, flexible staking allows the user to access or withdraw his funds any time he wants. This means that the user may complete a given staking period before withdrawing assets. But, with flexible staking, users could only receive lower interest yields.

Benefits Of Crypto Staking

Cryptocurrency staking is quite essential as it offers some benefits to crypto holders. Some of these include the following:

• Stakers get rewards of additional tokens

Rewards of additional tokens are the foremost reason for most stakers. In addition, the process will allow you to receive interest as you lock up your holding. Hence, staking remains an excellent means of generating passive income from the yield between 10% to 20% yearly.

• More eco-friendly

There are no environmental threats associated with the staking. This is because it involves no pollution of any sort to the atmosphere. In addition, unlike mining, the process doesn’t use fossil fuel, and hence, is highly eco-friending in its operation.

• Facilitate blockchain efficiency and security

Through staking, blockchain networks can confirm and validate their transactions. The process facilitates the efficiency of the protocol as well as its security. It takes the staking process for blockchains to maintain the smooth running of operations within their platforms.

• Stakers receive network participation and voting rights

Staking allows customers to gain participatory rights within a network. With their funds, they now become deep-rooted with the platform’s activities. Invariably, they receive the right to vote and engage in other moves affecting the network.

• Staking requires no equipment, unlike crypto mining

There is no special equipment or machine that you need to complete staking. This is unlike mining, which requires some resources and keeps on the edge while solving mathematical puzzles to earn rewards.

• Helps stakers to grow their holdings

Staking stands as one of the means that holders can use in growing their holding effectively, primarily via an exchange. All the customer needs to do is link the relevant tabs on the exchange platform following the given instructions. It requires little or no effort from the user. He will sit and watch as his holding increases.

Risks Associated with Staking

Despite all its benefits, some risks are associated with the staking of cryptocurrency tokens. This is due to certain factors influencing the staked coins’ security and performance.

Below are some of the risks with crypto staking.

• Volatility Of Cryptocurrency

The volatility of cryptocurrency stands as the most significant risk associated with its staking. This is because of the possible dipping of the price of the staked tokens, which could lead to a considerable loss. Therefore, before you stake any coins, you will need to consider the volatile nature of crypto tokens to pattern your staking strategies.

Most minor protocols will offer high staking rates to customers to attract them to their tokens. However, such crypto coins are more susceptible to a price crash. Therefore, you should always research a cryptocurrency before stake its token.

• Lock-Up And Unstaking Periods

Getting the best from staking your coins requires that you opt for mainly rigid staking that strictly demands a specified locking period. However, you can’t access or withdraw your funds until the completed period.

Also, following the end of a staking time, unstaking your tokens has a minimum period. Therefore, you should keep both the lock-up and the unstaking period in mind while staking your crypto coins.

• Possible Cyber-Security Issues

Staking from your online wallet or through an exchange could suffer a possible cyber-security threat. This will lead to a loss of all your crypto holdings. But some users try to circumvent this risk by opting for a hardware wallet for their staking. Hence, they engage in cold staking.

• Disruption In Validators Uptime

Every staked coin is held in a specific validator node which is expected to have 100% uptime. Therefore, a validator’s uptime disruptions will effectively affect its transaction ability. This will invariably cause the network to penalize the validator for such troubles.

• Damage Or Loss Of Hardware Storage

Using a physical or hardware wallet provides better security and protection to your crypto tokens than a software wallet. As a result, some customers prefer to stake their crypto tokens using their hardware wallets. But one significant risk with such practice is that there could be possible damage or loss of the wallet. This will invariably lead to the loss of your staked tokens.

Best 10 Cryptocurrency Coins for Staking

When you have some crypto tokens that you’re possibly not trading with, the best way to maximize your holding is to stake the coins. However, when you are specifically planning to buy a cryptocurrency for staking, you should consider if that cryptocurrency is a good investment.

Here are the best cryptocurrency coins for staking.

 1. SkateMoon (SMOON)

StakeMoon is a decentralized protocol that aims to incentivize users to hold their tokens on a long-term basis. The network runs on the Binance Smart Chain with liquidity-creating and staking technology.

The protocol strives to maintain its goal by using two fundamental means:

First, StakeMoon imposes a 15% taxation rate on all its transactions. This serves as a discouragement to the daily market speculators and traders of the StakeMoon tokens. So, the network doesn’t favor investment strategies on a short-term basis.

The protocol distributes 10% to token holders from the taxation fee and allocates the remaining 5% to its liquidity pool. Hence, StakeMoon token holders will receive dividend payments.

Secondly, staking on the network gets rewards to encourage the long-term holding of StakeMoon tokens. The staked tokens are what enable the StakeMoon to confirm blockchain transactions. Also, fees generated from the senders of the transactions are paid to the stakers that provide liquidity on the platform.

Hence, staking on StakeMoon allows you to receive the yield from the staking pool. Also, there is no minimum redemption period for locking StakeMoon tokens during the staking process.

Furthermore, customers interested in staking the StakeMoon tokens don’t need to get Bitcoin accounts. Instead, they can conveniently purchase the tokens with real-time market price by depositing funds into their accounts through Mastercard or Visa.

2. Ethereum (ETH)

Ethereum is the first blockchain to operate with innovative contract technology. Its programmable functionality attracts developers to create applications on it. Though it started as a Proof-of-Work Network, Ethereum has shifted to the Proof-of-Stake consensus mechanism.

The popularity of Ethereum makes its token, ETH, a good crypto coin for staking. By staking up to 32 ETH, you will become a validator. This means that you will be responsible for processing transactions, storing data, and adding new blocks on the Ethereum blockchain. However, you can stake fewer ETH on the network. Whether you’re staking as a validator or not, Ethereum will incentivize you to lock up your holder for the security and operability of the blockchain.

3. Polkadot (DOT)

Polkadot operates with a Nominated Proof-of-Stake (NPoS) protocol for the security of its network. The functionality of the network is to enable the interoperability of several blockchains.

Staking your DOT holding empowers the security and smooth running of the network. In addition, your staking can be a validator in which you will facilitate the 24/7 running of a node. Also, you may stake as a nominator by nominating another staker as a validator.

With excluding the validator’s commission rate, Polkadot has an annual yield of about 10%. Validators get rewards from validating blocks that are distributed among their nominators. The nominating process, also known as an election, occurs after each era, 24 hours on Polkadot. You may decide to stop nominating any time you want. However, there’s a waiting period of 28 days before you can unstake your tokens.

4. Cardano (ADA)

Cardano is the first Proof-of-Stake blockchain that is founded on peer-reviewed research. Its operation uses pioneering technologies to ensure the sustainability and security of decentralized apps and systems.

Staking Cardano’s native token, ADA enables transaction validations on the blockchain. In return, the stakers receive rewards in token additions to their holdings. Users will get a stake in the network’s overall functionality by leaving their ADA coins on the platform. Also, this is proportional to the number of their holdings.

However, a better means of staking ADA is through a staking pool. The process will maintain the governance and security of the Cardano blockchain.

5. Solana (SOL)

Solana is a decentralized blockchain that enhances scalability while supporting user-friendly applications. The network creates a difference for itself by executing transactions as they come instead of processing them in blocks.

By staking SOL, stakers delegate their tokens to validators to increase the validators’ voting weight. The payment of staking rewards comes from a portion of the network’s inflation. Also, staking yields depend on the validator uptime and its commission, the number of SOL tokens staked, and the current inflation rate on Solana.

The initial inflation rate of Solana is 8% annually. This value progressively decreases by 15% YOY to a 1.5% annual inflation rate long-term fixed value.

6. Polygon (MATIC)

Polygon is a Proof-of-Stake blockchain protocol developed to support and connect Ethereum-compatible blockchain networks. The network features high scalability while maintaining low gas fees for its transaction from its functionality. Hence, Polygon poses great competition for Ethereum, causing many customers to shift from the Etherem blockchain.

The staking of MATIC, polygon’s native tokens, enables validators to run nodes on the network and maintain the platform’s security. Also, stakers are rewarded with tokens of MATIC. When you delegate your MATIC tokens to a validator that experiences disruptions, it will cause a slashing on the staking rewards. Usually, disruptions occur when a validator goes off or can’t maintain its operational hardware.

7. PancakeSwap (CAKE)

PancakeSwap is an Automated Market Maker running on the Binance Smart Chain to provide unlimited liquidity to customers. In addition, it is one of the protocols that offer high-interest rates on staking.

There are several liquidity pools on the PancakeSwap. You can stake your CAKE tokens on the platform to earn rewards with CAKE coins and part of trading fees on the network. The interest rate for staking CAKE depends on the liquidity pool that you choose. So, you should consider the APY and APY rates of the different pools to determine your dividends before staking your tokens.

8. Kusama (KSM)

Kusama functions as Polkadot’s public pre-production platform. It supports developers to test and experiment with Polkadot’s blockchain applications before the final release on the network. Hence, Kusama serves as a sandbox for developers. So, Kusama facilitates the testing of all official Polkadot upgrades.

Kusama has the same underlying codes as Polkadot. However, it’s less restrictive and gives developers the flexibility they need in designing Polkadot applications.

To stake KSM, you could either be a nominator or validator. The nominators will nominate a validator that will manage their stated tokens. The validator has to run the node assigned to him through data validation. At the end of the staking period, each validator allocated a reward that was distributed to all the nominators that nominated him.

9. Cosmos (ATOM)

Cosmos is a decentralized protocol that enables an ecosystem of blockchains to facilitate interoperability and high scalability. The blockchain runs using the Proof-of-Stake consensus mechanism.

By staking Cosmos native token, ATOM, users can earn a certain percentage of interest as their rewards. The platform offers 9.7% APY for staking. Moreover, stakers receive the voting right and decide on proposals on the network. Also, the process contributes to the governance and security of the Cosmos Hub.

10. Tezos (XTZ)

Tezos is a decentralized blockchain that processes peer-to-peer transactions and facilitates the deployment of smart contracts.

The staking process of Tezos native token, XTZ, also called baking, comes in two ways: delegator or validator (self-baker).

To be a self-baker, the user will stale a minimum of 8,000 XTZ tokens. This will enable him to run a full node validator. Delegators can stake any number of XTZ tokens without any minimum to earn the staking rewards.

Fundamentally, a stakers earning depends on XTZ token market price. Other factors that could affect a staking reward include the number of tokens staked, the staking period for the coins, the delegated validator, and the total XTZ tokens staked on the network.

Conclusion

Understanding the importance of staking is a treasurable knowledge that will help you with your cryptocurrency investment. Staking comes with lots of benefits, of which the primary aim is to earn passive income. When you have some crypto coins you intend to hold for a long time, the best way to profit from your holding is to stake your assets.

However, it would help to analyze any digital asset’s profitability and price-performance before opting for staking the token. Though some cryptocurrencies may offer higher staking rates, the volatility of digital assets could cut down your holding. Moreover, the smaller cryptocurrencies are more vulnerable to price crashes, or you may find it difficult to sell your earning when you complete the staking process.