Anyone who has dived into the crypto space would be familiar with the term “staking.” For the noobs who have heard but don't know, staking is a form of passive income that will be explained further down. That said, there's a new player in the space: restaking. This is a concept that several pro investors have yet to grasp totally. Many think of it as another layer of staking. But is it?
Here, you will be walked through the differences between staking and restaking. Each concept will be thoroughly explained, and insights into how they work will be given. Ready to dig in? Let’s get started!
What is Crypto Staking?
As stated in the intro, crypto staking falls under passive income. It involves locking crypto tokens for a set period to support blockchain operations. In exchange for staking, you are rewarded with additional tokens. Think of it like depositing money into a long-term savings account, and the interest is paid in crypto. This is a way of putting your assets to work for you, earning passive income over time.
Note: Staking is mostly used in networks that run on proof-of-stake. The more you stake, the more you can potentially earn—kind of like getting bonuses for staying loyal.
What is Crypto Restaking?
Although this is not a lecture on the English language's grammatical structure, let’s take a look at the prefix “re.” Based on the dictionary, it means “again” or “again and again” to indicate repetition.
Adding “re” to “staking,” therefore, means to stake again and again. Thus, crypto restaking is the process of reinvesting an asset following its initial staking.
Instead of letting the previously earned rewards sit idle, you put them back to work. It’s simply a way of doubling down on your initial investment, similar to reinvesting dividends in traditional finance.
How Does Traditional Staking Work?
Imagine it like this: when you stake your crypto asset, you’re “pledging” it to the network. This sort of translates to, "I trust this system, and I’m willing to support it." The tokens you staked are then used to run blockchain operations such as validation.
Did You Know: PoS networks use validators—people who have staked their crypto—to confirm transactions.
Here’s a step-by-step guide detailing the process of traditional staking;
- Locking your crypto asset: You commit a specific amount of cryptocurrency to a blockchain network. The network must operate on a Proof of Stake (PoS) consensus mechanism.
- Stakers as Validators: On the PoS blockchain, there are people in charge of the validation process - validators (stakers). Their job is to confirm transactions and add new blockchain blocks. Staking increases your chances of being a validator.
- Rewards for Participation: Staking rewards are given to validators. It’s a way of saying thank you for adding blocks and keeping the network secure. The reward is typically in the form of additional cryptocurrency.
- Passive Income: The received rewards are based on factors such as the amount of crypto staked and the staking duration. Your crypto can create a passive income stream similar to earning interest on a savings account.
- Unstake (optional): Although not acceptable across all PoS networks, there is the option of unstaking. This would be withdrawing your crypto after a certain period (not applicable to a fixed-duration stake).
The Process of Restaking Explained
Restaking takes the concept of traditional staking a step further. Here's how the process works:
- Restake: Instead of holding onto staking rewards or cashing out, there is a reinvestment option. This is the essence of restaking—you take the earned rewards and lock them up again to compound your earnings. It’s much like taking a ripened fruit from a tree in your garden to plant more trees.
- Automate or Restake Manually: There are two options for restaking: Automatic and Manual. Automatic restaking is an agreement with the platform to reinvest your rewards as soon as they mature. Manual, on the other hand, is restaking when you feel it’s the right time. Using our garden analogy, it’s like choosing between letting the garden grow naturally or tending to each plant yourself.
- Earnings Growth: Over time, the compounding effect kicks in. If the PoS network is profitable, you shall experience immense multiplication. How? Your original stake plus your restaked rewards will start earning even more, multiplying your overall earnings. It’s like your garden expanding with each cycle, yielding more fruit than before.
- Consider Lock-Up Periods & Risks: Just like staking, restaking locks your funds for a period, and crypto values can fluctuate. It’s essential to be aware of these risks while enjoying the potential for greater returns.
Example of Crypto Restaking
Let’s say you stake 10 ETH on the Ethereum 2.0 network, earning a 5% annual reward. By the end of the year, you will earn a reward of 0.5 ETH. Instead of taking the profit when it matures, you decide to partake in Ethereum restaking. Now, you are staking 10.5 ETH. By the end of the next cycle, a 5% reward would be 0.525 ETH. Your compound earnings become 1.025 ETH over a 2-year span. Keeping the Ethereum restaking up, your tokens work harder without needing to add more upfront.
Staking vs Restaking: Key Differences
Although they are both ways to earn passively, they are not the same thing. Here are four key differences between staking and restaking;
- Earning vs. Compounding: Although the main objective of staking is validation, you still earn rewards for locking your token. On the other hand, restaking’s main aim is to compound earnings over time.
- Reward Structure: In staking, you only earn rewards on your initial stake. With restaking, you earn rewards on both your original stake and reinvested rewards. Therefore, restaking leads to exponential growth.
- Management: Staking requires minimal management. When you stake, you lock up your funds and wait for yielded rewards. Restaking may require more involvement. This is especially true if you manually reinvest rewards.
- Risk: Staking carries the risk of market fluctuations. With restaking, the risk is amplified as more of your rewards are reinvested and locked up. This makes it more sensitive to market downturns.
Staking vs Restaking: Earning Potential
When it comes to maximizing earnings, staking and restaking offer different approaches. Here's a breakdown of their earning potential;
- Staking provides a steady flow of rewards based on your initial locked-up crypto. Your earnings are predictable, as you earn a fixed percentage of returns over time. However, your rewards only grow in direct proportion to your original stake. Thus, the earning potential is somewhat limited.
- Restaking, on the other hand, significantly boosts your earning potential through compounding. By reinvesting, you're earning on your initial stake and accumulated rewards. This snowball effect means your returns can grow exponentially over time. The longer you restake, the more your rewards multiply.
In short, staking offers reliable and straightforward returns. Restaking allows you to tap into greater earning potential, letting your rewards generate even more rewards.
Key Takeaways
- Staking lets you earn steady and profitable rewards by locking up crypto. The locked tokens help with network validation and security.
- Restaking reinvests your staking rewards to compound earnings. This leads to exponential growth over time.
- There is only one mode of staking, and it requires minimal management. Restaking may involve more effort than manually reinvesting rewards.
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