In cryptocurrency mining, the Proof-of-Work (PoW) protocol has completely dominated, despite its apparent limitations and high cost of operation. That is why this new protocol has been developed.

Proof of Stake (PoS) has been gaining ground in cryptocurrency mining for years, so it is not surprising that it will be the new dominating protocol in the blockchain world in the coming years.

In this article, you will learn how to make money by providing liquidity to PoS cryptocurrencies, aka staking.

What is staking crypto?

There is a misconception that the only way to gain money in cryptocurrencies is by trading, that is, exchanging one for another to earn using a difference in order to make a profit. There is a much simpler way to increase the amount of crypto you have, and that is by staking, one of the essential tools in the DeFi ecosystem.

DeFi staking is an effortless and fast operation of immobilizing cryptocurrencies in exchange for a return that can work as a passive investment. Although it may resemble a deposit of money in a bank by generating interest with each passing day, it has key differences.

Staking is carried out in both digital and physical wallets, on crypto platforms, or in different decentralized finance projects that run on blockchains, with all the security and privacy improvements of this type of network. The funds are not exposed to the economic, monetary, or country's foreign exchange policy.

To grant the security of the blockchain, staking is used to contribute to cryptocurrencies and receive rewards. For proper explanation, we could draw a parallel with the "fixed-term" banks offer. In it, an amount of money is locked for a predetermined time, for which the bank offers a monthly interest.

Staking is not done with fiat money, but instead with tokens or cryptocurrencies, with volatile priced assets subject to supply and demand in a free, unregulated market. One could resolve this issue of volatility by staking stablecoins: cryptos that reference price against the dollar is always stable. Although stable coins like Ethereum, DAI, Tezos, USDT, or USDC usually give lower APY than altcoins.

For the other cases of cryptocurrency staking, the concept of "stake" can be explained as "bet", inherited from the world of casinos and gambling. By stakingm "you are betting" on the cryptocurrency and its price rise.

For future cryptocurrency holders, there is the possibility of obtaining additional returns beyond the increase in the asset's price. In the end, staking is an excellent way to earn profits just by owning the token.

How does staking work?

Staking can be done on all proof of stake networks (PoS). This security mechanism was created as an alternative to Bitcoin's proof of work (PoW). In PoW systems, some hardware is required to be able to solve complex mathematical calculations and thereby validate network transactions.

Although this allows a robust validation system, it requires the "miners" to carry it out. On the other hand, it consumes a lot of energy and requires specialized equipment, video cards, or ASICs (cards specifically designed to mine Bitcoin).

In the case of the proof of stake system, or proof of participation, the user locks a number of tokens in a wallet in the form of a node. With this, the system can verify that the transactions are valid. Thus, the algorithm randomly selects a node to certify the transactions and, in exchange, gives the user holding the crypto a reward. The chance of reward increases in accordance with the number of tokens owned.

In this way, putting more tokens in staking is like buying more tickets in the lottery, the chances of being selected (being a winner) increase.

How to stake crypto and what types of staking exist?

One of the easiest ways to start staking is through an exchange or entity offering this service, like MyCointainer staking options. This is an excellent opportunity for those with a limited number of funds or who want to take their first steps in cryptocurrency investment.

To start staking, you need to have the cryptocurrencies inside the exchange or wallet and decide on the number of tokens you want to invest in.

There are staking pools for those looking to invest low amounts but wanting to maintain ownership of their assets without depending on a third party. These work like an exchange, but in a decentralized way. Users can access them with a low amount of funds and all pool participants contribute their tokens to increase the chances of validating the next block. Then, the rewards are divided proportionally according to the participation of each investor and the service provider usually charges a commission.

More prominent investors can choose "cold staking". In this method, users stake the cryptocurrencies stored in a cold wallet. These wallets are specific hardware that does not have an internet connection, making them more secure and less vulnerable to attacks. This is the most recommended way for users with substantial amounts of cryptocurrencies.

Crypto staking does not require a great deal of knowledge from the user. With less than 15 clicks, you can resolve an operation, including how long it takes to log into a platform or wallet and review the available amounts and the conditions of the procedure. There are also no minimum amounts for staking and the deposit can be withdrawn at any time, with the user still obtaining the yield generated until then.

Staking is summed up in depositing a number of tokens, since its reference price in dollars is expected to grow over the days due to the valuation of the project, more people joining its community or because the coin gained larger worth. This way, the interest works more like an "extra prize" for trusting the project since users already gain a benefit for the act of holding a token that has risen in price.

When a token loses value during the term of staking, for one reason or another, the interest serves to cushion the fall of the price measured in dollars.

What is the mechanism of obtaining rewards when staking?

By staking coins, rewards are received in the same network currency. It is a good way to increase your holding of a crypto asset, especially if the strategy is long-term.

The percentage of rewards received is calculated with various factors and varies according to each blockchain. In some cases, it is adjusted block by block and calculated based on the number of locked coins in the wallet, how long it has been active, the total number of coins staked in the network, the inflation rate, etc.

In other blockchains, the rewards are fixed. This gives the “staker” more predictability and is used as compensation for inflation which encourages you to spend your coins instead of saving them.

In the same sense, users must consider that multiple blockchains lock the tokens for a certain time as part of the requirements. They cannot be released until the stipulated staking time is over.

What are the benefits of staking?

The main advantage of staking is that it saves energy. Since the validation is done with the coins locked, this drastically reduces electricity consumption.

Another advantage is that the users always have control over their assets and the chances of losing funds are very low since they are locked and are in total control of their owner.

Staking is also an excellent way to earn profits beyond the price movement of the token. It is a perfect opportunity for investors with long-term strategies to obtain extra returns.

On some networks, those who stake also receive voting power. In this way, they can participate in the decisions regarding changes in the network.

What are the risks?

When the user delegates the coins for staking, they can access them through the user's wallet. Therefore, it is vital to maintain the excellent security of the wallet and the private keys.

With so many cryptocurrencies, you can find many that offer high returns on staking. It is always important to research that the project you invest in is reliable, to avoid falling for scams and losing all your investments either because it is a scam or because the crypto you supported entered a time of high speculation.

PoS networks tend to centralize cryptocurrency staking. The more coins you keep, the more likely you will validate the next block. It can grow to more control and less decentralization over the networks.

How to choose the best crypto staking coins?

Staking should be perceived as a long-term investment in which you are betting on the revaluation of assets in at least six months.

For this reason, you should analyze the potential benefit based on the fundamentals of  cryptocurrencies that you are going to stake.

The first thing you should analyze when making cryptocurrency predictions is the project behind the cryptocurrency of your choice. Understanding if the project is worthy or not could help you choose something that can improve the market. Only worthy projects bring long-term benefits.

Do not get carried away by the first currency with a bullish rally. Projects like Cardano in 2020 or Solana in 2021 were successful because their roadmap promised an improvement that, in turn, represented an upgrade for the crypto ecosystem in general. So, when choosing your investments, do enough research rather than relying on the first YouTubers who share their vision on the matter.

Doing a fundamental analysis is necessary before making any long-term investment, since, after this analysis, you will be able to know the advantages and disadvantages of the project and its chances of growing over time.

Coin price prediction made easy

We recommend analyzing the crypto you want to stake based on the following:

  • Current and future cryptocurrency predictions are based on the situation of the world economy: in this sense, what is sought is to know the scenario in which the project will be founded and how it could behave in the face of any economic change in the future. For example, today oil is a good investment, but given the evident growth of eco-friendly energy, perhaps in 20 years oil will be worth the same or less than a soft drink.
  • The team behind the project: it is not a guarantee of success, but it says a lot about the project's potential, if you know that the team behind it is truly capable of taking on the challenge.
  • Blockchain analysis: spend time analyzing the transactions in the project's blockchain. This way, you can assure that there are no signs of the chain's manipulation or other vulnerabilities.
  • Project roadmap: It is essential to know what the next steps of the project are. You can look through them in the roadmap of the company's Whitepaper. Opt for a cryptocurrency with a purpose that can last into the future. Remember that today there are thousands of projects that were born and no longer exist. The cemetery of useless projects is enormous and you certainly don't want to bury your money.

Finally, some advice that all experienced investors recommend following. Don't use the money you can't afford to lose. The cryptocurrency market is very volatile and if you don't want to lose money, the only way is to be patient. It is useless to enter the staking market with money that you will need in two months in case of any emergency because if it happens at a time of market correction, you could lose a lot.