Is crypto staking worth it? Meaning, risks and how to make money

Cryptocurrency staking is gaining momentum as a favorable alternative to traditional crypto mining, presenting an attractive avenue for investors eager to cultivate passive income.

With Ethereum's significant transition to the Proof of Stake (PoS) consensus model and a growing number of blockchain networks embracing staking mechanisms, this innovative investment strategy has captured the attention of the decentralized finance (DeFi) community.

In this comprehensive article, we explore the foundational principles of crypto staking, its mode of operation, and its potential for profitability as we look ahead to 2025.

What is staking in crypto?

Staking in the realm of cryptocurrency encompasses the pivotal process in which holders commit their digital assets to a blockchain network, thereby bolstering its operational capabilities—such as transaction validation and enhanced security measures.

In exchange for their staked contributions, participants are rewarded with additional tokens, fostering a mutually beneficial relationship between individual investors and the network.

This practice is rooted in the PoS consensus mechanism, which stands in stark contrast to the energy-demanding Proof of Work (PoW) system that powers Bitcoin.

By utilizing PoS, blockchain networks can significantly increase their scalability while minimizing environmental impact, making it an increasingly attractive choice for contemporary blockchain initiatives.

Investors are increasingly viewing crypto staking not just as a method of income generation, but as an efficient way to maintain ownership of their assets without the burdensome overhead associated with mining operations.

This accessibility makes staking a compelling option for a broader demographic of cryptocurrency enthusiasts and investors.

As a simpler and less labour-intensive alternative to cryptocurrency mining, staking in crypto is gaining prominence among diverse groups of financial investors.

This article defines crypto staking, how it works, and whether it is a profitable DeFi venture.

How does crypto staking make money?

The staking process requires participants to lock a definite quantity of cryptocurrency tokens into the blockchain. From this pool of staked assets, the network randomly selects validators—individuals or entities responsible for confirming transactions.

Typically, the probability of being chosen is proportional to the number of coins: the greater the number of coins deposited and secured, the greater the likelihood of being chosen. Randomness makes it more difficult to manipulate the results of crypto stakes.

This method resembles a lottery in that the number of cryptos held corresponds to the number of lottery tickets.

Validators engage in transaction verification and, in exchange for their efforts, receive rewards calibrated to the volume of tokens they have staked. 

In many instances, investors opt to delegate their staking rights to a reputable third party or join a staking pool. Within these pools, multiple users consolidate their investments to amplify their chances of securing rewards, with the pool operator usually taking a nominal fee before distributing the benefits among the participants.

Can you make money staking in crypto?

Random selection guarantees that investors may contribute to the processing volume of blocks by making their currencies accessible to the network. Hence, the percentage of the block processing volume increases according to the number of accessible cryptos.

This involvement is referred to in the industry as the "staking reward." This allows investors to earn from their current coins without the need to mine them.

However, the staking reward is not paid in euros or dollars, but in the relevant cryptocurrency.

The net outcome in crypto staking is variable. If the value of a coin drops while you have locked coins, you may be worse off than if you had sold them and earned a profit. While the cryptos are staked, they are often not tradeable, so you cannot sell them when the price reaches a new high.

Therefore, the payout must be substantial and enticing enough to entice all kinds of investors to engage in crypto staking. In contrast to the preceding, however, it should not be so high that too many coins are made, since this would lead to inflation.

To prevent a dramatic decline in the price of locked crypto, it is preferable to ascertain the project's sincerity, even though the provided interest rate may sometimes seem excessive.

Although staking crypto is one of the safest and simplest methods to generate money, it is not always the best solution if you are seeking significant returns on your crypto asset investments.

The most lucrative alternative remains the bitcoin exchange, where you may capitalise on price fluctuations. In any event, staking crypto is a wonderful way to gain money without taking excessive risks.

What is the best cryptocurrency to stake?

Although a small number of cryptos can currently be used for staking, there is still a long way to go before this procedure can be implemented with all coins.

A significant number of cryptocurrencies that employ proof-of-work blockchains, a consensus mechanism that has shown to be quite reliable in allowing decentralised consensus, cannot be staked. 

Bitcoin, the principal and most well-known cryptocurrency, stand out among cryptocurrencies that is not be used for staking.

The 10 most significant cryptos that can be staked are:

1. Ethereum (ETH)
2. Polygon (MATIC)
3. Solana (SOL)
4. Cardano (ADA).
5. Cosmos (ATOM)
6. Tezos (XTZ)
7. Polkadot (DOT)
8. Avalanche (AVAX)
9. Shiba Inu (SHIB)
10. VeChain (VET)
11. Over Protocol (over)

Benefits of crypto staking

One of the primary benefits of crypto staking is that it eliminates the need to purchase expensive hardware and excessive electrical energy consumption that mining necessitates.

This makes staking cryptocurrency easier, more environmentally friendly, and more energy efficient than mining. In addition, the profits generated by this system are credited in cryptocurrencies.

On the other side, staking contributes regularly and substantially to making the blockchain robust, stable, and secure.

Another key benefit is that crypto staking gives a guaranteed return and a more or less consistent and even predictable source of revenue in contrast to the proof-of-work method, where coins are awarded randomly with a low chance.

Another plus to staking in cryptocurrency is that, unlike ASICs and other mining gear, the value of your staked cryptocurrencies does not decline, but can only be impacted by differences in market pricing.

Types of crypto staking

There are currently two forms of staking:

1. Proof of Stake (PoS)
2. Delegated Proof of Stake (DPoS)

Proof of Stake (PoS)

Proof of Stake is the earliest form of crypto staking. In this concept, users must make a portion of their coins accessible to the network and beyond their control as a security measure.

The chance of discovering a block, and hence the payout to the one staking, is computed using the number of accessible coins and other variables, such as the random selection of blocks or the coin's age.

Delegated Proof of Stake (DPoS)

Delegated Proof of Stake (DPoS) enables users to assign their currency balances as votes, granting them voting rights according to the number of coins they own.

The votes are then used to elect delegates who would govern the blockchain on their constituents' behalf, guaranteeing security and consensus. Typically, these chosen delegates deliver a portion of the participation incentives to their people in proportion to their individual efforts.

Common Mistake Made by Beginners

you are more likely to be profitable in crypto staking if you learn from the mistake of others, the following are common mistake made by beginners:

You’re more likely to succeed with cryptocurrency staking if you learn from others' mistakes. Here are some common missteps beginners often make:

1. Lack of research: Some crypto holders are drawn in by attractive returns and begin staking their assets without fully understanding how it works or the risks involved.
2. Overlooking price volatility: New crypto investors might not fully grasp that the value of their staked tokens could decrease while they are locked up.
3. Ignoring lockup periods: A beginner might not take the lockup period into account before staking their crypto, only to realize later that they can’t access their funds in case of an emergency.
4. Neglecting asset security: In their eagerness to earn rewards, some token holders fail to consider the range of security risks associated with their staking decisions. For instance, they may participate in noncustodial staking without the proper knowledge, safeguards, or equipment.
5. Underestimating slashing risk: Active crypto stakers who run their own network nodes may fail to calculate the risk of losing cryptocurrency due to slashing penalties.
6. Overlooking tax implications: Staking rewards could be taxable, but many beginners overlook this crucial aspect.
7. Staking too much: Cryptocurrency staking is just one strategy to potentially grow your portfolio. It shouldn’t be your only approach to generating returns. In short, staking is a way to diversify your crypto investments.

Conclusion

As the cryptocurrency landscape continues to evolve at a breathtaking pace, staking emerges as a compelling and strategic investment option.

With the ascendance of Ethereum 2.0 and the burgeoning ecosystem of PoS-driven blockchains, the potential for staking as an attractive avenue for crypto investors is poised to rise, offering opportunities for both seasoned participants and newcomers alike.