On March 24 2021, Coinbase decided to offer approximately 3.75% annual percentage yield (APY) for staking Cardano’s native cryptocurrency – $ADA and the coin experienced a 35.3% price growth in 24hours following the development.
That event and other ones showcase the reason why traders and investors should understand the concept of coin staking in order for them to gain access to lucrative yields, increased flexibility, and insights into the price dynamics of certain digital assets.
Staking is an activity where a crypto user locks up a specific amount of coins in a wallet for a certain time and receives rewards in the form of yield in exchange. It offers crypto holders a way of putting their digital assets to work and earning passive income without needing to sell them.
How it works
As of April 2022, the total value of cryptocurrencies staked exceeded the $280 billion threshold, according to Staking Rewards. This shows that staking has become a popular way to make profit without trading.
Staking is only available with cryptocurrencies that use the Proof-of-stake model to process payments. POS is a specific method used by certain blockchains to select honest participants and verify new blocks of data being added to the network.
Firstly, participants pledge their coins to the cryptocurrency protocol. Among those participants, the protocol chooses validators to confirm blocks of transactions. The higher the amount a participant pledges the higher the chances of being chosen as a validator. Every time a block is added to the blockchain, new cryptocurrency coins are minted and distributed as staking rewards to that block’s validator. In most cases, the rewards are the same type of cryptocurrency that participants are staking. However, some blockchains use a different type of cryptocurrency for rewards.
As mentioned earlier, staking is only possible with cryptocurrencies linked to blockchains that use the proof-of-stake consensus mechanism. The predominant cryptocurrencies that are available for staking include $ETH, $ADA, $SOL, $LUNA, $AVAX and $DOT. Big exchanges like Binance, Kucoin and Coinbase offer staking opportunities in-house on their platform.
Merits and risks
Staking is a good option for investors interested in generating yields on their long-term investments and aren’t bothered about short-term fluctuations in price. It also has the added benefit of contributing to the security and efficiency of the blockchains that appeal to them.
However, staking has its own downsides. Cryptocurrencies generally are volatile, drops in price can outweigh the rewards earned. It is only optimal for those who plan to hold digital assets for the long term regardless of the price swings.
Staking pools can also be hacked, resulting in a total loss of staked funds. And since the assets are not protected by insurance, it might result in little or no compensation.