Crypto Staking: How Investors Earn Passive Income From Their Tokens

Crypto staking allows investors to earn rewards by locking certain cryptocurrencies to a Blockchain network. The returns are not fully guaranteed and can be based on the cryptocurrency, network, and the staking method.

What Is Crypto Staking

Crypto staking means locking your cryptocurrency into a proof-of-stake (PoS) network to support and validate transactions and keep the Blockchain running. In return, you can earn rewards.

You can stake the tokens yourself or delegate them to a validator. The staked tokens act as a collateral when validators verify transactions and add new blocks. The rewards can come from newly issued coins or a share of the transaction fees. “It allows investors to potentially generate additional returns while continuing to hold an underlying asset,” said Prateek Gupta, head of business, Mudrex.

Only cryptocurrencies that use(PoS can be staked. Bitcoin, on the other hand, uses proof-of-work, and, therefore, does not offer staking.

How Investors Earn Through Staking

You earn these rewards by committing your crypto to a PoS network. You can run your own validator set-up, or delegate your balance to a third party or use a staking pool that handles the process for you. There is also liquid staking, which gives you a derivative token representing your staked funds so you can use it elsewhere.

Your payout usually comes from new tokens or network fees. Exactly how much you earn depends on the Blockchain, how much you put in, how long you leave it there, validator performance, and the fees charged by the platform.

“For investors with a longer-term view, it can be a way to put otherwise idle tokens to work. However, staking rewards should be viewed in the context of market volatility, as the value of the underlying token can move significantly,” said Balaji Srihari, vice-president - business, India, CoinSwitch.

Risks To Consider Before Staking

It’s important to note that poor validator performance or penalties can affect your rewards.“Liquidity risk is often underestimated when staking. Some networks require investors to wait through an unbonding period before they can access their assets. During a sharp market decline, that can prevent investors from responding quickly to changing conditions,” said Gupta.

The value of the cryptocurrency can also go up or down while it is staked. Also, fees, platform risks and security issues can affect the returns. Liquid-staking tokens can also temporarily trade below the value of the underlying asset.