Staking Crypto, Explained Like I’m Five

Imagine a piggy bank that doesn’t just store your coins but also helps make more of them. That’s similar to “crypto staking.”

Staking Crypto

When crypto holders place their digital assets into a special pot, over time, they receive extra coins. So, if you have some crypto lying around sitting idle, you might want to consider staking them to help the network and earn some extra money along the way.

But first, let’s understand staking a little bit more…

What is Staking?

Staking, in simple terms, means committing to hold onto a certain type of crypto and earning in the process. When you stake a specific cryptocurrency, it will be “locked” for a certain period of time, during which you’ll earn rewards based on the APY (Annual Percentage Yield).

For example, if a cryptocurrency has an APY of 2%, and you stake $1000 worth of that crypto, you would earn $20 by just staking it and doing nothing. However, it’s important to note that APYs are indicative and not guaranteed, and may vary over time.

Why Would I Earn Rewards from Staking?

The reason your crypto earns rewards while staked is that the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake.

This mechanism is how they ensure that all transactions are verified and secured without needing a bank or payment processor in the middle.

When you choose to stake your crypto, it becomes part of that verification process.

What Crypto Can I Stake?

The currently commonly known cryptocurrencies that can be staked are Ethereum, Tezos, Cosmos, Solana, and Cardano. However, note that their APYs vary, and the cryptos that can be staked also differ according to the platform.

Check out our post on cryptos with the best staking rewards to find out more.

Who’s Eligible to Stake?

Eligibility largely depends on two factors: the platform you are using and your region.

As long as you have the crypto that supports staking with the platform you are using and your account is verified, you are generally allowed to stake. However, it also depends on rules and regulations of specific regions.

For example, in the United States, according to Coinbase, residents of Hawaii and New Jersey are unable to stake their coins.

Click here for more information.

What Happens When My Crypto is Staked?

When you stake crypto, let’s take ETH for example, you are committing your digital assets to support a blockchain network and confirm transactions. The ETH will be locked up and used to validate transactions on the network.

While staked, you typically cannot use these assets for other purposes. As a reward for staking crypto, stakers receive rewards, usually in the form of additional coins or transaction fees. The reward is often proportional to the amount staked and the length of time it’s staked.

Are There Fees Involved?

There’s generally no platform fee when you stake (or unstake) crypto, but you’ll have to pay a network fee which is paid to the Ethereum network to process your transaction.

Platforms, in general, also charge an earnings fee on the rewards earned from staking. For example, Binance charges 20%, and Coinbase charges around 25%.

Here are some platforms and information about their staking fees:

Can I Unstake My Crypto (and How)?

Yes, you can, and the unstaking process is generally relatively easy but varies according to the platform.

With Coinbase, for example, to unstake, all you need to do is go into your assets that you have staked, then click the ‘unstake’ button, and the process of unstaking will start. It usually takes between 1-4 days or sometimes weeks for an unstake transaction to process and complete.

The timing can vary depending on network conditions. Once your unstake transaction has been processed, you can claim your funds.

Risks of Staking

Staking your crypto comes with certain risks:

  • No guaranteed rewards: Rewards are dependent on the crypto network, and past rewards don’t guarantee future earnings.
  • Changing rules and conditions: The network’s rules and conditions can change, which may affect rewards.
  • Protocol Penalties: Some networks penalize validators for not following rules, known as “slashing.”
  • Risk of Slashing: Although rare, slashing events can happen, so it’s important to understand the risks before you stake.

Where to Stake My Cryptos?

Here are some commonly used platforms that most people use when it comes to staking cryptos.

If you’re considering staking your coins, it’s recommended that you check them out and do a bit of research regarding their trading features, staking and rewards, and the process of staking and unstaking before committing to any.

Final Thoughts: Is Staking Worth It?

Staking can be worth it if you’re interested in earning passive income and supporting a blockchain network, provided you’re comfortable with the risks involved. However, it’s crucial to understand the mechanisms and risks of the cryptocurrency you plan to stake before proceeding.

I hope this post gives you a general idea of what staking is and how to stake. Trade safe!