Minimizing Risks when Investing in Cryptocurrency: The Advantages of Staking

If you have crypto and you want to easily earn percentages on it, staking is a less risky way of investing in crypto, and which coins to use for this. You will not only support the operation of the blockchain network but also receive passive income. The MC.today editorial board found out what staking is, how it works, and which coins are best suited for earning.

How does cryptocurrency staking work?

Cryptocurrency staking is comparable to a bank deposit. To ensure the functioning of the blockchain, you store coins in a cryptocurrency wallet. In this way, you lock a certain amount of cryptocurrency, which means that you cannot use it for a certain period of time.

Staking is a more environmentally friendly variant of mining. Compared to the latter, it does not require large computational power. Therefore, it doesn’t need a lot of electricity.

The Proof of Stake mechanism is closely related to staking. When using it, the principle applies that the probability of creating blocks increases with an increase in the amount of storage. You will receive a reward in the form of a certain number of coins for each confirmed transaction and created block in the blockchain.

How did Proof of Stake appear? Sunny King and Scott Nadal, developers, introduced the first Proof of Stake mechanism in 2012. The problem with high energy consumption during bitcoin mining was supposed to be solved by the algorithm. At that time, the cost of storage in the Bitcoin network was on average $150,000 per day.

Now for one bitcoin transaction, which takes an average of ten to twenty minutes, it requires as much energy as an average American family uses over almost seventy-two days.”

If you want to stake, you need to choose a cryptocurrency that uses the Proof of Stake model. For example, Solana, Cardano, and Tezos. Then you can choose the investment amount. This can be done through several well-known cryptocurrency exchanges such as Coinbase, and so on.

Your coins remain with us during staking. You cannot use them for a certain period because you block them in your wallet. If you want to sell your coins, you can opt-out of staking. Many things affect when exactly they can be received. For some cryptocurrencies, there is a minimum storage period, which can be three months. You cannot withdraw your money all this time.

Staking and mining are consensus mechanisms, that is, transaction confirmation algorithms in the blockchain. What’s the difference between them? They ensure the legitimacy of transactions. For example, no one tries to spend the same coins more than once.

However, there is a difference between them. Miners compete to solve cryptographic puzzles as part of the Proof of Work protocol. Whoever copes with the task faster gets the right to verify the last block of transactions in the blockchain, as well as to create a new block. He receives a small reward in the form of the cryptocurrency he is mining.

Mining uses hardware with high computational power, such as specialized ASIC chips. Therefore, mining requires a lot of energy.

The Proof of Stake method is used in the trading process. Now you don’t need to solve cryptography puzzles to confirm transactions in the blockchain. It’s enough to have a certain number of coins in your account. Thus, transactions here happen much faster.

In addition to this, there is a much lower entry threshold here, as it does not require the purchase of powerful equipment, as for mining. excluding certain cryptocurrencies. For example, for independent staking of Ethereum, you need to have at least 32 coins. One costs about two thousand dollars.

Advantages and disadvantages of staking

Main advantages of staking:

• It’s a simple way to earn interest on the cryptocurrency you own.
• Unlike mining, you don’t need special equipment.
• You are helping to support the blockchain’s operations.
• Staking is more eco-friendly than mining, as it doesn’t require large energy expenditure.

Here are the risks associated with staking:

• Unstable cryptocurrency prices. If the price of your coins falls, you may lose more than you earn from staking. So this investment option is suitable for those who plan to hold crypto for several years regardless of price fluctuations.
• In some cases, you need to lock the coins for a while, during which you cannot remove them from staking.
• If you’ve chosen a flexible staking option, you will still have to wait some time to get your coins back. For example, seven days or more.
• Staking exchanges can be hacked. In this case, you would lose both the coins you put into staking and your reward. And since you can’t insure your assets, chances are you won’t get compensation. For example, in 2021, hackers stole approximately $30 million from such an exchange.

Types of staking

There are several classifications of staking. For example, by the way of getting coins. Staking can be delegated, for example, to an exchange or become a validator, i.e., independently confirm transactions and create new blocks.

Delegating is much easier. This is usually what is meant when talking about staking. You simply lock your coins using a recognized validator. For this, you receive a reward, and validators take a small percentage of your profit.

To be a validator, you need to:

• understand the technical details of how cryptocurrencies work;
• have enough cryptocurrency, as it gives you a better chance of creating a new block;
• have reliable internet, similar to what is used in data processing centers.

Staking can also be divided into:

Fixed – where the user determines in advance the period for which he provides coins for staking. For example, for three months. Until this term expires, he will not be able to take his coins. Payment is usually a bit higher here than in flexible staking, so this option is chosen by those who want to earn more.

Flexible – here the end date of staking is not specified. That is, you can take your coins at any time. Interest on staking will accrue until the moment you withdraw crypto. This option is suitable for those who are used to having free access to their assets.

Staking in cryptocurrency and its halal status

As is known, Islamic financial law has clear principles that determine which financial operations are considered acceptable (halal) and which are not (haram). The main criteria are avoiding risk, speculation, and earning interest on debt (riba).

Staking in the context of cryptocurrency is a process where holders of a certain cryptocurrency lock their coins for a certain period of time to support the operation of the blockchain and in return receive a reward. This, in essence, is similar to how banks use their customers’ deposits to lend to other customers, but with a number of differences.

From the point of view of Islamic financial law, staking can raise a number of questions:

1. Risk and Speculation: Since the market value of cryptocurrencies can fluctuate, there is a risk of capital loss. However, staking typically does not affect the price of the coin in and of itself, and risks are more associated with the overall state of the crypto market.
2. Profit without Effort: Islam does not approve of earning profit without work or risk. However, in staking, the participant actually contributes to the network, providing security and stability.
3. Riba (Interest on Debt): The reward for staking can be interpreted as interest, which is prohibited in Islam. However, this reward is not fixed or guaranteed, and it can be viewed as a share of the network’s profits rather than interest on a debt.

In conclusion, the position of scholars and experts on the question of the halal status of staking in cryptocurrency can vary. Some may consider it permissible, while others do not. For a precise answer to this question, it is recommended to consult with a competent religious teacher or specialist in the field of Islamic financial law.

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