After delivering multi-fold returns over the past few years, the cryptocurrency market is in a prolonged bear cycle, one that has prompted many long-term investors to question whether it is possible to generate returns from these digital assets while holding onto their positions.

There are more than a few ways for long-term crypto token holders to generate additional yields and one of the most popular options is investing in staking pools, which promise additional income apart from capital gains through token value appreciation.

Staking is available on blockchains that employ a proof-of-stake (PoS) consensus model and requires holders to lock their crypto tokens in a specific blockchain address (or wallet) in return for an annual percentage yield (APY) that is commensurate with the number of tokens staked.

A suitable option for crypto investors with a long-term investment horizon, staking on blockchains promise a regular income stream, without needing to become a blockchain validator.

What is blockchain?

A blockchain is a decentralised digital system of recording transactions across several computers or nodes on a peer-to-peer network. Blockchains maintain a decentralised and secure record of all transactions, with trust preserved between all parties without the need for a central or third-party authority.

This digital ledger of transactions is distributed across the entire network of nodes, with some nodes acting as validators in the consensus mechanism.

A holder can pledge (or stake) their digital tokens to qualify as a blockchain transaction validator or verifier. Validators maintain the blockchain's integrity by constantly computing the linkage from the first block to the last and earn crypto tokens as a reward for their contribution.

How does staking work?

For a blockchain network to perform transactions with speed and security, it is important to have an ample number of validators in the network, thus requiring more nodes or clients to pool their crypto tokens with the blockchain.

Often, this may not be possible for retail crypto investors, limiting the number of potential candidates that could assume validator status.

This is where a staking pool comes in, allowing multiple crypto token holders to contribute their tokens and grant the staking pool operator a validator status in return for the staked tokens.

In this way, all investors who deposit their crypto tokens can gain rewards for contributing their computational resources. This gives retail investors an opportunity to earn income through passive investing.

Most crypto investors havent heard of the concept of a staking pool. Some perceive it to be a risky investment model due to the relative lack of investor awareness.

How to choose a staking pool

There are several crypto staking pools available for various cryptocurrencies that operate on a PoS blockchain. Investors would do well to choose notable crypto exchanges that operate public stake pools over private staking pools that may offer a higher APY.

It is advisable to go through peer reviews before selecting a staking pool and choose one that doesnt have too many holders already participating in it. This is important because all validator rewards are distributed after deducting the platform fee and a large staking pool usually offers a lower return.

Additionally, it is important to factor in the membership or entry fee to compute real returns that will be generated on the staked tokens.

Apart from considering the ranking, it is prudent to choose a staking pool that is transparent in its functioning and provides regular performance updates. This includes key decision-making regarding the future roadmap of the pool and how stakeholders are made a part of the process.

Points to remember before staking

Crypto staking does not involve investing in mining equipment to generate returns and thus offers crypto investors an opportunity to be a part of the blockchains core functionality with the benefit of earning regular income.

Staking investors are usually privy to information regarding vital updates or improvements being made on the blockchain and are thus a privileged lot.

There are many staking pools for popular blockchain networks and it is important that investors choose those where the pool operator has an exemplary track record of performing the validators role without malicious intent.

Staked tokens act as a guarantee for the blockchain. The network may burn a certain amount of staked tokens if a block is formed with invalid or fraudulent transactions, resulting in investors losing capital.

Additionally, once an investor decides to join a staking pool, their crypto tokens are locked in at a specific blockchain address or with a third party and this may result in them losing direct control over their tokens.

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Want to earn money staking on blockchains? Heres how - Moneycontrol