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What Is Staking Crypto?

staking crypto

Listening to the banks talking about Crypto, you’d think that “staking” was something they’d do to it, to stop it sucking the juice out of their financial system.

“Staking Crypto” is when you agree to commit your Crypto tokens so that you can’t use them anymore without “withdrawing” them. So, why would you “stake” your tokens? Simple: to earn more tokens (basically: interest).

There are two kinds of “crypto staking” to brief you on. While both result in you being marginally richer, they’re achieved in different ways, and your tokens are used for different things. But first… you need to know something simple about blockchains!

Blockchains made easy

You’ve probably heard of a “blockchain”.

A blockchain is the backbone behind every Crypto coin. It combines a shared database of transaction blocks (that can’t be edited – that’s quite important!) and an almost infinite number of “addresses” (like little post boxes, or mini bank accounts).

In the non-Crypto financial system, transactions and data storage are done centrally by the bank using its own fantastically expensive equipment inside a very secure environment. Cryptocurrency works by sharing the storage and transaction processing amongst a large number of different computers belonging to other people.

“How can they be trusted?”, you’re probably asking yourself. Well, they can’t. That’s why blockchains are designed not to need “trust”. Every blockchain has a way of adding transactions to the database that involves getting an agreement on what just happened between lots of different computers. This is called “consensus”.

In exchange for processing transactions and keeping the coin working, the blockchain generates new coins to give out for doing it. It can’t reward everyone, so there’s competition for those rewards.

Proof of Work

In something like Bitcoin, that competition is “proof of work”, where computers compete to solve a complex mathematical problem by brute force. Imagine a huge “Battleships” board where the computer chooses a square area, and behind some of them, there’s a Bitcoin. In the early days, the squares you could choose were quite big, so your chances were good. Now, the squares are tiny (and getting tinier!) so it’s much more difficult and requires much more computing (and electricity) to do.

This works great, but it’s a little heavy on the electricity, though the electricity spent does give some fundamental value to the coin.

Bitcoin is the most famous “proof of work” Cryptocurrency. Ethereum is one too, but in its 2.0 version, it’s moving towards a “Proof of Stake” strategy.

Proof of Stake

Some Cryptocurrencies adopted another, newer, method called “Proof of Stake”. That’s where the blockchain essentially runs a lottery to reward people for processing transactions if you “stake” your coins: i.e. remove them from circulation by essentially freezing them. The winners in the lottery are rewarded based on the amount staked, the time the coins have been there, and a large dose of luck.

Oh, and if you cheat in “Proof of Stake” and it finds you out: your tokens get eaten (a “slashing” event).

Reputable proof of stake Cryptocurrencies include Ethereum 2.0, Polkadot, Cardano, Tezos and Algorand. There are a lot more, some of which are scams: not that it’s obvious!

In both systems, it’s unlikely that any small coin holder will be lucky enough for this award, which is why “pools” exist, which gather the processing power or coins of large numbers of people together to combine their resources and share the rewards.

Functionally, what happens if you join a pool is that you commit your Crypto and get rewarded by a small amount every so often – like interest (but less regular and not guaranteed).

Staking for interest

Many Cryptocurrency owners stake their currency for something that looks a bit like “interest”.

Some decide that they’d rather cut out the technical bit and “stake” their coins with companies paying regular and predictable interest (sometimes per-second, which is some great compound interest potential!).

This means changing what you trust: blockchain staking means trusting in the technical system behind Cryptocurrency and the people who created the coin. Interest staking means trusting in a particular company to use your coins wisely and keep their promises.

But, with a reputable company, how does interest staking compare with blockchain staking?

  1. You can invest in a basket of Cryptocurrencies, including some that are “proof of work” like Bitcoin, and you can also invest in “stablecoins”, which are less volatile and a better choice for beginners.
  2. The interest you earn is predictable and stable. With a company like AQRU, we pay interest daily and track it to the second.
  3. The technical stuff is handled by someone else who knows their stuff, and all you have to do is to watch your investment grow.
  4. Depending on the company, there’s less lock-in for your Crypto.
  5. There are regulators looking on (though your deposits aren’t protected by Government schemes like FDIC).

How do the companies use your coins behind the scenes to make your interest? By participating in liquidity schemes, and by lending to businesses that are willing to pay extra interest rates to borrow assets inside the Crypto ecosystem. Generally, there’s a basket of decentralised finance activities they’re qualified to do (and experts in). It’s not a world apart from an investment fund, except in a less mature (and more lucrative) market.

So, how do you benefit from staking? Well, assuming that blockchain staking is a bit technical, the best way to get going with interest staking is to get started with us, at AQRU! We are a leading provider and it’s free to sign up on our app or website. We even invest 10USDC for you for free when you sign up so you can see the per-second wealth display. It can be funded with debit cards (minimum amount of 100 Euros), and the only fee involved is $20 to withdraw in Crypto (fiat withdrawals are free). You can buy Crypto in the app through our trusted provider MoonPay, though (as with all Crypto purchases) transaction fees apply. Buying in the app is good because you avoid the withdrawal and transfer fees charged when you try to buy Cryptocurrency elsewhere, like an exchange.

AQRU pays a fixed annual percentage yield of 0% on Crypto and up to 7% on stablecoins and doesn’t tie up your Crypto.

But, as always, due diligence is your friend! There’s a lot at stake!

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