Staking explained simply: passive income with cryptocurrencies
The world of cryptocurrencies offers numerous opportunities to generate income - from traditional trading and lending to an increasingly popular method: Staking. Unlike speculative trading, where you hope for price gains, staking allows you to make your cryptocurrencies work for the network and earn regular rewards. But how exactly does it work and what should you look out for if you want to start staking?
In this article, we go into detail about what staking is, how it works and the opportunities and risks involved.
What is staking?
Staking is a concept that is closely associated with blockchains based on the so-called proof-of-stake (PoS)-consensus mechanism. These blockchains do not require energy-intensive miners, as is the case with the Bitcoin network, but rely on participants "locking" their coins to secure the network and validate transactions.
Basically, staking works like a kind of digital savings account. You deposit your coins in a wallet or platform, and these coins are used to ensure the security and functionality of the network. You receive new coins as a reward. The amount of your rewards depends on the amount of coins staked, the duration and the specific rules of the network.
A simple example: If you stake 100 coins on a network like Cardano ($ADA (-1,4 %) ) and the annual return is 5%, you will receive 5 additional ADA as a reward after one year.
Why staking?
Many crypto investors hold their coins for longer periods of time anyway, whether out of conviction in the project or as part of their long-term strategy. Staking offers an opportunity to actively use this time and generate additional returns.
Staking also has a technical dimension: by participating, you help to keep the network secure and efficient. In contrast to proof-of-work systems, which require enormous amounts of energy, proof-of-stake is much more resource-efficient and therefore more sustainable.
But staking is not just a win-win situation. There are also risks that should be well thought out in advance.
How does staking work in practice?
The staking process starts with choosing a suitable network and a cryptocurrency that you want to stake. Well-known blockchains that support staking include Ethereum (since the switch to proof-of-stake), Cardano, Solana, Polkadot and Cosmos. Each of these blockchains has slightly different requirements, reward models and rules.
Let's take an example: You want Cardano ($ADA (-1,4 %)
) staking. To do this, you first need a wallet that supports staking, such as Daedalus or Yoroi. Once your ADA coins are in your wallet, you can delegate them to a validator - a special node in the network. Validators are responsible for verifying transactions and creating new blocks. In return, they share the rewards they receive from the network with you.
A big advantage of Cardano and similar networks is that you retain full control over your coins. You only delegate your voting rights, but the coins remain in your wallet.
How high are the returns?
The returns on staking can vary greatly. They depend not only on the specific blockchain, but also on the total amount of coins staked, the network's inflation rate and other factors.
Ethereum, the largest network with proof-of-stake, currently offers annual returns of around 4-7%. Cardano is at 4-5%, while Polkadot offers significantly higher rewards at 12-15%. However, these figures are subject to change as they depend directly on the dynamics of the network.
It is important to note that higher rewards often come with higher risks. Networks with new or less proven technologies could be more susceptible to errors or attacks.
What are the risks?
As with any investment opportunity, there are risks associated with staking that should not be ignored.
The most obvious risk is the volatility of the crypto market. Even if you get an attractive return of 10% per year, sharp falls in the price of staked coins can quickly wipe out these gains.
Another risk is the so-called slashingwhich occurs on some networks. Validators who misbehave or have downtime can lose some of the staked coins - and as a delegator, you share this risk.
Some networks also have a blocking period. If you decide to stake your coins, you cannot sell or transfer them during this period. In the case of Ethereum, this period is currently several months, while networks such as Cardano or Polkadot offer more flexible models.
Staking via wallets vs. exchanges
There are two main ways to participate in staking: via decentralized wallets or centralized exchanges.
Decentralized wallets such as Ledger, MetaMask or Daedalus offer you full control over your coins. This means more security, as your coins are not stored on a platform that could be hacked. However, this method requires a little more technical know-how.
Exchanges such as Binance, Kraken or Coinbase make the process much easier, but carry the risk of entrusting your coins to the platform. If the exchange becomes insolvent or is the victim of an attack, you could lose your assets.
Is staking right for you?
Staking is particularly suitable for long-term investors who plan to hold their cryptocurrencies for a longer period of time anyway. It offers the opportunity to generate additional income while actively supporting the functioning of the network.
Before you start staking, however, you should take a close look at the specific conditions of the blockchain and assess your risk appetite. For beginners, it is advisable to start with smaller amounts and gain experience before staking larger sums.
Conclusion
Staking is a fascinating way to utilize cryptocurrencies beyond their pure value appreciation. It combines technological innovation with financial benefits and can be an important part of a diversified investment strategy.
However, as with any investment, do your research, weigh up the risks and only commit capital that you are prepared to tie up for the longer term. With the right strategy, staking can be a rewarding and exciting addition to your crypto portfolio.
