What is cryptocurrency staking in simple terms

Cryptocurrency staking is the process of users locking their cryptoassets into a blockchain in order to keep the network running and get rewarded for it. This mechanism is particularly popular in Proof of Stake (PoS) based blockchains and its variants. Unlike traditional mining, a user does not need powerful equipment to participate in staking. It is enough to possess a cryptocurrency and put it into steaking to start earning.

What is cryptocurrency steaking

Cryptocurrency staking is a process that allows cryptocurrency holders to lock their funds into the network to secure it and create new blocks. Rewards are distributed among staking participants in proportion to the number of assets blocked. That is, the more tokens blocked, the higher the reward received will be. Staking has become a popular alternative to traditional cryptocurrency earning methods, offering a simple and affordable way to generate passive income. Staking also keeps the network running, as the blocked funds play the role of collateral, confirming that the participant is interested in honest interaction with the network. If a validator (a network participant who verifies transactions and adds new blocks to the blockchain) tries to act against the rules, they can lose some or all of the blocked funds, making steaking safer.

What are the Types of Steakin'

There are several main types of steaking. Each has its own characteristics and approaches, differing in risk, profitability, and level of difficulty in use:

- Centralized steaking

Centralized steaking is conducted through crypto exchanges such as Binance, Bybit, OKX and so on. In this case, all users transfer their assets to the platform, which conducts the steaking itself and then distributes the rewards. Centralized steaking is convenient for beginners, as it does not require in-depth knowledge of blockchain and steaking, and the exchange takes responsibility for all transactions. 

- Decentralized steaking

Decentralized staking is done directly on the blockchain network. To do this, users connect to decentralized applications (DApps) or work with wallets that support steaking. Examples of such wallets include OKX WEB3 Wallet, Trust Wallet, MetaMask, and Rabby Wallet. Decentralized steaking appeals to more advanced users because it requires self-management of assets, but provides greater control over funds and reduces the risks associated with centralized intermediaries.

- LP token stacking

LP-tokens (Liquidity Provider Tokens) are obtained by users providing liquidity to pools on decentralized exchanges (DEX) such as Uniswap or PancakeSwap. When users add their assets to a liquidity pool, they receive LP tokens, which can then be locked in staking. This allows you to generate revenue from two sources at once: commissions from trading and rewards for steaking LP-tokens.

- Fixed steaking

When participating in fixed-staking, funds are blocked for a predetermined period of time. The participant agrees not to withdraw their assets for a set period of time, which allows for a more stable income. Fixed-staking is convenient for users who are ready to “freeze” their assets for a certain period of time and are not afraid of temporary market fluctuations. It is best suited for holders of stablecoins (e.g. USDT, USDC).

- DeFi-staking

DeFi-stacking is a form of decentralized staking conducted through smart contracts of decentralized financial platforms such as Aave, Compound, and Yearn Finance. In DeFi-stacking, users can choose from a variety of protocols, each offering different terms and levels of returns. The main feature of DeFi-stacking is high yield, but also increased risks associated with the use of smart contracts.

- Indefinite staking

With perpetual staking, there is no mandatory asset locking period. The user can withdraw their funds at any time. This type of steaking attracts users who value flexibility and the ability to withdraw assets quickly, although returns in such programs can be lower than with fixed steaking.

What are the risks of steaking cryptocurrencies

Despite the potential benefits of steaking, there are a number of risks that are important to consider before participating in any type of steaking program:

- Blockchain periods

In many cases, staking requires mandatory locking of assets for a certain period, especially with fixed staking. If the cryptocurrency's exchange rate drops dramatically or financial needs arise, the user will not be able to withdraw their funds. This creates a risk of lost profits or losses due to the volatility of cryptocurrencies.

- Risks of smart contracts:

Decentralized staking and DeFi staking often use smart contracts to automatically distribute rewards. Smart contracts are programs that run on the blockchain, and their errors can lead to vulnerabilities. If a project's smart contract is vulnerable or subject to a hacker attack, the user can lose their investment.

- Impermanent losses

Impermanent losses can occur when staking liquidity pools. If the price of one of the currencies in the pool changes sharply relative to another, the user may face withdrawal losses. This risk is most relevant for those who participate in LP-token steaking on decentralized exchanges such as Uniswap and SushiSwap.

Which exchanges support steaking

Most major cryptocurrency exchanges offer centralized steaking, making it accessible to a wide audience. Here are a few popular exchanges that support cryptocurrency steaking:

- Binance

Binance offers a wide range of coins for steaking, as well as fixed and perpetual terms, allowing you to choose the right option for you.

- Bybit

The platform offers many options for passive cryptocurrency earning, including liquidity pools and liquidity mining.

- OKX

The exchange provides many variations for earning Earn section for both experienced users and beginners.

- Coinbase

Coinbase supports staking for a number of major cryptocurrencies such as Ethereum and Tezos. The exchange also offers a secure wallet for storing and managing assets.

Centralized exchanges make the process as simple and attractive as possible for newcomers by providing transparent terms and asset security. However, staking on exchanges involves handing over asset management to the platform, which can be less secure than a decentralized approach.

Conclusion

Cryptocurrency staking has already become one of the effective ways to generate passive income, suitable for both beginners and advanced users. It offers flexibility of choice, the ability to support blockchain operations and participate in the development of decentralized technologies. However, like any investment instrument, steakking involves its own risks, such as blockchain funds, market volatility and technical vulnerabilities. When choosing a platform and type of staking, you should evaluate both potential benefits and risks to make an informed choice and select a strategy that is optimal for your risk management.