Business

Is Crypto Staking Profitable? What is the downside of staking?

3 Mins read

If you want to see your crypto portfolio grow fast, you surely cannot miss out on crypto staking. It is conceptually very similar to earning a fixed rate of interest on your savings in a bank account. So why is crypto staking profitable for investors? Are there any risks in crypto staking? Let’s analyse…:.

What is staking in crypto?

Staking is a concept that is associated with crypto coins with a “proof-of-stake” consensus mechanism. As we know, cryptos are based on distributed ledgers called blockchains. Every blockchain follows a consensus mechanism to validate every transaction.

In the case of “proof-of-stake” coins, a democratic system is used as a consensus mechanism for validation. For verifying every transaction, validators are chosen based on the number of coins they have staked and the duration of their stake.

The staking mechanism also determines the distribution of newly mined coins of the particular crypto coin. The size and duration of one’s stake determine one’s share of the distribution of newly mined coins.

How does crypto staking work?

When you stake your coins, your coins become part of a staking pool. Usually, these staking pools have thousands of other coin holders staking their coins. The size of the staking pool determines the share of newly minted coins that accrues to the staking pool. At the end of the staking period, all accrued coins are re-distributed as staking rewards to all the stakers.

Staking pools may or may not allow un-staking before the expiry of the staking period. If they allow un-staking before expiry, coin holders can un-stake their coins at any time. In such a case, they get back the entire amount staked by them plus the staking rewards accrued until un-staking.

Is crypto staking profitable and beneficial?

As stated earlier,  crypto staking is one of the best ways to earn passive income on your crypto holdings. Combined with the potential of price appreciation, crypto staking can help you grow your crypto holdings significantly over time. According to Staking Rewards, the average interest rate for staking is over 11% for the top 263 coins that offer staking benefits.

Besides lucrative financial rewards, crypto staking is beneficial in various other ways, as stated below –

1.      Enhances security of the blockchainCrypto staking helps to secure the blockchain of the coin.

2.      Efficient transactions on the blockchain – Staking offers an incentive to validators to validate every transaction. With more validators to validate transactions, blockchain transactions can be efficiently validated and processed.

3.      Environmental-friendly mining of crypto – The distribution of newly mined coins of proof-of-stake coins is determined by the size of staking pools. It is a more environmentally friendly way of distributing newly mined coins than using expensive, energy-consuming mining equipment to perform mathematical calculations.

4.      Take part in governance – Many crypto coins also offer governance rights to the stakers. By exercising such rights, stakers can manage the governance of the crypto coin’s protocol and any future upgrades.

Risks of crypto staking

While crypto staking is a great way to earn passive income, it does come with a few risks associated with it –

1.      Locked-in period – Crypto staking pools are usually for a fixed period and require participants to lock their coins for the entire period. In such cases, one cannot withdraw their coins from the pool, especially during a market downturn.

2.      Price depreciation – Even if you earn passive income in your staked crypto, you are still at risk of market downturns causing price depreciation in your coins.

3.      Decreasing staking rewards over time – The rewards for staking decrease over time as more and more stakers join the pool.

Top crypto staking coins

Despite the risks associated with staking, it is a fairly sound way to earn passive income for your crypto coins. To grow your crypto wealth in the next few years, you can consider these crypto coins, which offer lucrative staking rewards –

1.      Solana – 6.05% rewards

2.      Terra – 5.86% rewards

3.      Cardano – 4.99% rewards

4.      Avalanche – 9.03% rewards

To start your crypto staking journey today, buy these coins on Zebpay today!

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