With crypto staking, you earn funds by holding coins or tokens in your wallet. On Proof of Stake blockchains, rewards based on the minting of new coins are distributed to those who stake the funds depending on the size of their holdings.
What is crypto staking and how does it work?
You can also combine your holdings with other investors’ funds in a staking pool. When a pool earns, you receive a portion proportional to the size of your contribution to the pool.
Your money never leaves your wallet and is not at risk, making crypto staking a very safe investment. However, you cannot remove your funds during the staking period. Staking periods range from 1 day to a month or more.
Staking options can be found on cryptocurrency exchange sites. Some crypto wallets also have staking features.
The amount you earn depends on the market conditions and the currency you bet in. Investors typically see the equivalent of an annual percentage return on their investment of between 7% and 25%, which is comparable to what investors hope to earn in the stock market – without putting their holdings at risk. This makes staking a desirable source of passive income. It’s no wonder so many investors are asking what crypto staking is all about.
Staking should not be confused with lending, although it is similar. Decentralized cryptocurrency exchanges rely on automated market maker systems that allow funds to be temporarily borrowed into liquidity pools as part of AMMs (Automated Market Makers). Some refer to temporarily locking funds in a liquidity pool as staking, but technically this is borrowing. The result, however, is the same: you earn interest on funds that you commit not to withdraw for a certain period of time.
Staking and borrowing are like buying a Treasury bond, which restores the capital of the investment along with interest in exchange for the right to use the funds for the duration of the bond.