Cryptocurrency, in addition to increasing the balance from price changes, offers traders a variety of alternative ways to earn. Among the most popular is staking. More and more investors are looking to use it to generate substantial returns. You can learn what such manipulations are and how to get rich with their help from our material. We will explain how staking works, warn crypto traders about potential pitfalls. This article will be useful for both beginners and professionals.
What is staking?
This activity is one of the passive ways to extract profit, where the method to increase profitability is not buying or selling in the trading terminal, but the fact of ownership.
One of the main advantages of this activity is that there is no need to purchase mining equipment, which becomes less attractive and more expensive as the cost of mining units increases with the price. Another factor in favor of staking is the absence of the need to buy more miners as the price and complexity increase. If mining is based on PoW technology, staking uses the PoS mechanism.
Simply put, the basis of increasing the balance with this mechanism is holding cryptocurrency in a constantly connected online wallet. Similar to the stock market, this activity resembles owning shares to receive dividends. There are several types of earnings, based on the principles of the specific unit. The income is easier to obtain than trading, requiring much less effort. For this, you need a computer with 24/7 internet access. Once you purchase a certain crypto asset, staking is considered started. We will analyze this process in detail further.
Features of PoS work
With mining using the updated consensus mechanism, reward distribution is based on creating structures with a different core than traditional mining. The profitability for miners remains, but it is distributed considering the available funds. Usually, the reward size depends on the share of the particular account in the total generated coins.
The difference between PoS and PoW is in the structure of creating units. In classic mining, the higher the hash rate of the hardware used, the higher the profit from participating in the computation of structures. Staking involves generation based on randomization principles, and the more coins a user has, the larger their income. A direct link with investing is observed — the larger the initial investment, the more impressive the potential income from rewards. The main condition is not to make a wrong choice of the most promising tool at the start.
The main advantages of passive investing through holding cryptocurrencies are resilience to external attacks and hacking by malicious actors. Traders no longer spend time waiting for a trend to form but look for opportunities to acquire selected cryptocurrencies. Turnover decreases, and the price may increase. But the primary profit comes from payouts to owners based on their share in the block creation process. Additional gains can be obtained from selling when the value of a single crypto unit rises. Combining the two methods can ensure high income.
Disadvantages of staking
Earlier, one of the main unresolved issues was an algorithm for payouts that did not consider the holding time of the cryptocurrency. Here’s an example: Trader X buys 1,000 coins at the beginning of the month, expecting to receive an addition to their account by the end. Investor Y deposits 100,000 coins into their wallet, also by the end of the month. Y has a hundred times more weight in bonus distribution, despite connecting their wallet several weeks later than X. This was how it worked in real life — profitability was determined by the number of coins purchased, not by how long they were stored in the “safe.”
To solve this problem, version 3.0 of the algorithm was developed. How payouts are made under the new rules, we will explain further. There are functional differences between previous versions and the current one.
Now, anyone holding cryptocurrency can receive a reward only if the coins have been stored in their account for a certain period. The higher the duration of ownership, the greater the chances of receiving more funds.
Developers managed to eliminate the wealth factor and equalize all participants in the investment. Now, the fewer miners producing new structures, the higher the profit for each participant in the consensus.
Main participants in the process
Those who choose such a earning system are called “holders.” In translation from English — owners. Therefore, staking is often compared to stock investing — the essence of profit extraction is the same.
You can finish the profit extraction process at any convenient time. If the rules for maintaining the required reward amount are met, the owner will receive a bonus credited to their account, based on their share of the total funds.
System operation rules
Profit from holding coins will be paid only if:
- The wallet with the currency is active and constantly connected to the Internet.
- The stored coins are not used in any other operations. Any movement of funds automatically violates staking conditions.
- The payout is directly proportional to the number of coins. Some systems may limit the maximum amount of stored currency to ensure interest and equality among all crypto investors.
- The bonus is credited to the holder with each valid block calculation.
- Fees are fixed and known in advance.
All these advantages attract more investors seeking stable income systems in “crypto.”
Strategies
The two most popular strategies among holders are:
- Holding the currency. A simple and understandable scheme. It can involve using either a single PoS consensus or its hybridization with PoW. The instrument must be listed on an exchange to ensure profit. It is also possible to earn from the difference when selling at a higher rate than the purchase price.
- Buying currency not listed on an exchange. In this case, the person aims to own the maximum number of coins to secure the highest income from price growth. If the right tool is chosen, short-term profits can be greater than those from account growth. The main risk is that the tool may not ensure enough growth in the cryptocurrency’s value. New proposals constantly appear on the market, and choosing the most promising one is not easy. Therefore, any unknown instrument should be thoroughly studied before buying.
There is an opportunity to earn rewards both from personal funds and by joining pools. In this case, the bonus will be divided proportionally among each participant. Working in a pool is suitable for beginners with amounts below the minimum required for purchase and holding.
Working algorithm
To succeed in staking, follow this sequence:
- Select a goal for PoS mining
- Install, configure, synchronize, and ensure constant access to the network wallet for storing the asset. The wallet can be installed on a desktop computer or smartphone
- Wait for new blocks to appear
- Start the wallet
Conclusion
Trader reviews evaluate how the staking mechanism works and how profit is generated. The profit extraction process is quite simple and reliable. For those who avoid high risks, buying a reliable asset with a pre-known yield and high security is a good investment. In Russia, more and more crypto players are choosing this earning method. Following the rules from our material, anyone can become a passive investor in the cryptographic tools market.
