What are staking and inflation, and how can you set up a passive income?

What are staking and inflation, and how can you set up a passive income?

Staking is in a nutshell a process through which an eager crypto holder can earn a passive income. And, as it usually is with crypto, it can be rather complicated for those who are taking their first dive into the world of cryptocurrencies. But that’s why we’re here – to make things easier for you. Let's take a closer look at staking.

Normally, when you think about investing in crypto, the first thing that pops to mind is buying crypto on an exchange, such as Bitstamp. But there’s also another option, and once set up, it’s completely passive. We’re talking about staking cryptocurrencies or earning rewards via inflation.

What is proof-of-stake?

As you probably know, cryptocurrencies are based on blockchain technology where transactions are verified. All the data, meaning each verified transaction, is stored on the blockchain. Depending on the crypto you own and its supporting technologies, these validation processes are called “proof-of-stake” or “proof-of-work.” The prime example of the first will be Ether once it gets upgraded to ETH2, and the latter Bitcoin.

Both processes help crypto networks achieve consensus or confirmation that all the transaction data adds up to what it should. Achieving this, however, requires participants. In the case of BTC, all the validating on the blockchain is done through mining, in order words, with the help of electricity powering the mining machines. That’s why, environmentally speaking, there are greener coins than BTC in the market.

Rewards and locking periods

But with proof-of-stake currencies, the assets themselves do the hard work, namely, the staked assets. They validate the transactions on the blockchain and are useful to the entire crypto system in the same way that mining rigs are. In return, you get staking rewards. Think of it as interest for a fixed-term deposit in a bank. Similar to that, there are some cryptocurrencies that get locked in the process, such as ETH which you can stake via the ETH2 upgrade. Your staked ETH gets locked until the upgrade to ETH2 is finished, which is expected to be sometime until the beginning of 2023. Once that’s done, you’ll get full control of your staked ETH back in the form of ETH2, and all the staking rewards will have been accumulating up to that point in the form of ETH2R – up to 5.74% per year. If that seems a bit complicated to you, don’t worry, we’ve made it extremely easy through our Bitstamp Earn. You’re welcome to check it out.

Earning via inflation

On the other hand, with Algorand (ALGO), which is now also available through Bitstamp Earn, you can earn rewards via inflation or community rewards. Protocol determines the rate at which new tokens are added to the network. Those fresh tokens are then distributed to you as rewards.

Reward distribution for ALGO is therefore automatic. In this instance, we’re not talking about staking, but inflation earning. You earn rewards by merely owning and holding ALGO on your account, and with no strings attached. There’s no locking period, no secondary tokens as rewards, you just sit back and enjoy the steady influx and watch your total amount of ALGO rise. Currently, the rewards can be as high as 4.8 %, and are paid out daily, as opposed to ETH’s rewards which you receive monthly. And you get that warm fuzzy feeling inside that you, an investor, are approving and verifying transactions on the blockchain and thus helping elevate crypto to new heights.

Want to know more about staking and earning? Click here to learn how to set up a passive income.