A traditional way to invest in crypto and get a profit is to buy crypto and benefit from the difference in its market price when you sell it. However, this is not the only way to invest in crypto. Read our recent post on other ways of crypto investment. 

The recent post discusses how to earn on crypto staking. Staking means that you can put the crypto you have into work, fueling proof-of-stake (PoS) consensus mechanisms and receive passive income. In general, the process is similar to putting cash in a bank’s high-yield savings account and receiving interest on it. 

If you have not read our previous guides for beginners, go ahead:

• What is cryptocurrency and how does it work?,
• What is blockchain technology and how does it work?
• What is crypto exchange and how does it work?
• Crypto exchange: essentials
  
• Crypto exchange: how to choose crypto exchange
• How to invest in cryptocurrency
• What is ERC-20

Crypto staking in a nutshell

More and more blockchains, including Ethereum and Solana, use PoS which is more energy-saving compared to PoW. PoS operates on miners lending their crypto assets to be locked for a certain period just to support a crypto transaction. Out of all miners who volunteered to lock their assets one is chosen to validate a new block. The one who validates receives compensation for their work, i.g. passive income. 

Thus staking helps to legitimize the data and transactions entering the blockchain. To cut the way for ill-minded participants to act fraudulently, the locked-in sum of crypto could be taken away from them as a penalty if they validate improperly. In case they validate correctly they are rewarded with crypto. 

PoS validation

Staking is the way to organize an ongoing crypto supply for the network when validators are trying to stake bigger sums hoping to increase their chances of being chosen for validation and at the same time, knowing that in case they act improperly, their assets will be lost. Interestingly, a stake can consist of more than one person's assets. Sometimes users can participate in a staking pool. In such a case, staking pool operators get a chance to validate a transaction and the reward is shared among the pool participants.

Moreover, each blockchain has its own set of entry rules for users who would like to become validators of the network. For example, Ethereum validators should have at least 32 ETH on their accounts, which is around $100K. 

Such a big sum of money is not easy to get to become a validator and this is one of the biggest drawbacks of staking, at least Ethereum staking, that only rich people can participate. Anyway, staking is available on all blockchains that use proof-of-stake: Solana, Tezos, Cardano, etc.

Staking risks

1. Faulty validator node

You can stake your assets but if the node that is responsible for validation is not behaving properly, e.g. stays offline for a long time, then the network may penalize some of the staked tokens. 

2. Custodial wallet

If you are staking with the help of central exchange, then you are most likely using the custodial wallet provided by the platform. It means that you are not controlling the private key for your account. Not controlling the private key means that you do not actually own your assets either. In case a centralized exchange is hacked, you will lose access to your wallet.

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