Factors to Consider When Choosing the Crypto for Staking

Staking is one of the first things that comes to mind when discussing passive income from cryptocurrencies. However, once you decide to try staking, you encounter the challenge of choosing the most profitable currency. 

Here, we will explain what staking is and how you can participate in it. The article aims to provide criteria for selecting the best crypto for staking, review several popular options, and warn you about the risks associated with staking. Okay, let’s get started. 

What Is Cryptocurrency Staking? 

Is Staking Profitable? 

Types of Staking 

Staking On Exchanges 

Staking On Staking Pools 

Validator Staking 

Factors to Consider Before You Start Staking 

Popular Cryptocurrencies For Staking 

Risks Involved 

Conclusion 

What Is Cryptocurrency Staking? 

Cryptocurrency staking is a process in which asset owners lock a portion of their funds for a specified amount of time in exchange for yield (rewards or interest). In some instances, investors don’t need to lock their funds, but we will speak about it in the fourth chapter. 

The staking mechanism occurred as a part of the Proof-of-Stake (PoS) consensus protocol that came as an alternative to a much-criticized Proof-of-Work, a cornerstone of the Bitcoin network’s security and validation system. 

Staking aims to validate transactions on PoS-based platforms. The co-occurring rewards serve as an incentive for platform participants to lock their funds and take part in transaction validation. 

As transactions on the blockchain process automatically, cryptocurrencies need consensus mechanisms that ensure the validity of transactions and safeguard the network from spam, abuse, fraud, errors, etc. The Bitcoin network uses the Proof-of-Work mechanism requiring mining (performing a calculation that protects the blockchain from bots). 

Mining has numerous drawbacks, most of all excessive energy consumption. In this regard, Proof-of-Stake is a cleaner option. Asset holders up tokens in order to participate in validation. Scammers will have to lock too many tokens to interfere with a fair process successfully, so they will likely prefer to find opportunities elsewhere. 

For most people, however, staking is just the way to enjoy a passive income out of crypto holdings. In contrast to trading, staking doesn’t involve the traders’ headaches and huge risks associated with trading in a loss. We’ll speak about the risks involved in staking later. What makes cryptocurrency staking attractive is that it promises more lucrative returns than the investments associated with traditional finance. 

Rewards from staking depend on the amount staked. To increase the chance of receiving the transaction fee rewards, investors should stake more. If the validator “votes” for a proposed block of transaction that has malicious content or incorrect data, the staked funds may be lost. Such a situation is called “slashing.” 

Is Staking Profitable? 

Considering how popular staking is, the answer is quite apparent. By some accounts, on average, people grow their investment by 20% or 30% in a year through staking. So we can leave it at this: cryptocurrency staking doesn’t come without risk, but usually, it is profitable. 

Types of Staking 

There are several ways you can take part in staking. Normally, we can outline three types of staking. 

You can stake coins via the crypto exchange 

You can stake coins on the staking pool 

You can stake coins as a validator 

Actually, there are more ways. For instance, some crypto wallets allow users to stake tokens. Still, technically it’s not a big difference from staking via an exchange, so we won’t review this way of staking separately. The three basic ways to participate in staking will be described below. 

Staking On Exchanges 

Most huge centralized exchanges allow users to stake some tokens within the exchange interface. Technically, users provide their tokens to exchanges, and exchanges stake the corresponding amounts of these funds sending the respective rewards to users taking part in staking. 

On the one hand, the exchanges collect fees from users for staking via their services. On the other hand, in most cases, the staking returns on exchanges are high, and it can be totally worth it. 

Finding an exchange that allows staking isn’t a hard task. Some exchanges may offer something unusual. For example, XGo provides a superfluid staking feature. It allows users to stake coins without having to lock them. So if you decide to move the asset participating in staking, you just perform a transaction, and the staking period ends at that moment. You don’t have to wait for several weeks or even months. It provides investors with more freedom and control over their wealth. 

Staking On Staking Pools 

If you cannot point out an exchange that fits your requirements (for example, no exchange supports the staking of tokens you want to stake), you can opt to use a staking pool. 

Staking pools are usually operated by transaction validators. You must connect your wallet to such a pool to stake via this pool. If you can confirm that the staking pool and the validator behind it are legit, you can join this pool and lock some of your funds in return for rewards. 

Validator Staking 

If you become a validator on a PoS-based platform, you’ll be able to earn via validating transactions. This method is more complex compared to staking via an exchange or a staking pool and requires a significant starting investment. 

Factors to Consider Before You Start Staking 

Now, let’s finally name the factors you should consider before you start staking. The list can last forever, so we have picked the most crucial factors. 

Use case. Any cryptocurrency has better prospects if it can be immediately used in real life. If the crypto is used in the application or as a fuel of the blockchain-based ecosystem, it contributes to its value growth. 

The inflation rate of the asset. Check the inflation rate of the crypto you are considering for staking. If the token has a high inflation rate, there is a chance that your returns won’t add any value to your investment when the locking period is out. More than that, the invested funds themselves can lose a substantial part of their value due to inflation. 

Fixed supply. This factor is tied to a previous clause. If the coin doesn’t have a fixed supply, staking it may end up unprofitable. Due to scarcity, the value of deflationary tokens (tokens with a fixed supply) grows with time. Those tokens with unlimited supply are prone to price drops caused by inflation. 

Popular Cryptocurrencies For Staking 

Now, to make things easier, let’s name several tokens popular among stakers. In the early 2020s, Solana (SOL) became the most frequent choice of investors wishing to stake some crypto. The reasons behind this popularity are fast and cheap transactions and high staking returns. 

Ether (ETH), Cardano (ADA), EOS (EOS), and Polkadot (DOT) are among the leaders in staking, too. Some of these tokens bring stakers around 20% of annual revenue. 

Risks Involved 

Nothing comes for free, and no business is done without risk. In staking, the risks are usually associated with the need to lock assets for a specified period. We have warned you about the negative effects caused by the high inflation rate. Some tokens may lose their value by the time when the lock period finishes. It may not only make your profits negligible but also wipe out the value of your initial investment. Of course, we can’t solely blame inflation. The volatility of cryptocurrencies can ruin your staking experience. 

Conclusion 

There are not many factors to consider when you choose the right cryptocurrency for staking, so now you know everything you need to make the right choice. The more you learn about the tokens you are considering for staking, the higher the chance of success. So our main advice to you is to do your research on the crypto you want to stake, read about the platform you wish to use for that, etc. Staking is a profitable passive income method, and it totally deserves some dedication from you while you choose the proper asset.