In simple terms, crypto staking is a form of investment where you can earn passive income by simply locking your cryptocurrencies on specific platforms for a specific period of time.
There are two main ways of staking crypto:
PoS, or Proof-of-Stake, staking is the type of staking that is more commonly known and talked about. It is when you stake your crypto tokens to a validator on a blockchain network. The validator, in turn, is responsible for maintaining chain security on said network. As the number of tokens staked to the validator increases, so does the security and value of the blockchain.
dApp, or Decentralized Application, staking is a simpler form of staking in which the rewards are provided by the protocol that wishes users to lock their crypto assets into smart contracts. As the tokens generate rewards, the terms of the smart contracts are automatically fulfilled.
While a user’s journey in staking crypto might be simple, the actual mechanics are complicated. If one were to break it down in a simpler level however, you could say that when you stake your crypto, $OM for example, it enters a pool where it can be used to generate additional cryptocurrencies, similar to an interest-bearing savings account.
Through crypto staking, projects encourage users to lock up and hold their tokens in exchange for an opportunity to earn yield to reduce selling pressure. In fact, the tokenomics of most cryptocurrency projects set aside a portion of their maximum cryptocurrency supply to cater to this reward opportunity for users.
PoS chains utilize validators as markers of authenticity of on-chain data. To make sure that the validator plays an active role in securing the chain, an economic incentive is used to encourage users to stake their tokens. The rewards received by the validator is split among its stakers, and the chance of producing the next block is directly proportional to the stake per validator.
Cryptocurrency projects that launch their own native tokens often incentivize users to stake, and therefore lock, their tokens for the long term by offering yield. This way, selling pressure is reduced. The yield is included in the tokenomics and can be often seen as ‘ecosystem rewards’.
As with anything in technology, or the world in general, crypto staking is not without its risks. They can be split into three main categories: market risks, security risks, and smart contract risks.
The crypto market is volatile and therefore, the value of the staked tokens may differ based on external market conditions. Since the yield is often generated in the native token, a drop in the token price can easily affect the user’s investment.
Some projects may not follow the appropriate risk measures to secure the funds that have been entrusted to them by the users. For PoS chains, this also includes the risk of slashing, which happens when a validator does not perform its duty of securing a blockchain. In this situation, all the tokens staked to the validator are eligible to be slashed. Therefore, it is crucial that you stake your PoS tokens only to validators whom you trust.
If a project has not audited its smart contracts properly or if it inadvertently has generated an exploitable contract, then funds inside the smart contract are at risk. In the case of dApp staking, those funds are provided by users who lock up their tokens in exchange for a yields.
You should consider staking your cryptocurrencies if:
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