How Is Crypto Staking Different From Crypto Restaking?

If you have been in the crypto space for quite some time, you must have heard about staking, a low-risk approach for all your crypto investments. It’s a popular way for investors to earn passive income. However, a new concept known as “restaking” has emerged, adding another layer to the staking ecosystem.

This blog will explore the differences between crypto staking and crypto restaking, providing a comprehensive understanding of each process, their benefits, and their implications for the crypto market.

Let’s start!

What is Crypto Staking?

Crypto staking involves locking crypto assets for a specified duration to contribute to the functioning of a blockchain. In exchange for staking your crypto, you receive additional crypto.

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Numerous blockchains employ a Proof-of-Stake (PoS) consensus mechanism. In this setup, network participants seeking to uphold the blockchain by validating new transactions and adding blocks must stake predetermined amounts of crypto.

Staking ensures that only valid data and transactions are included in a blockchain. Participants endeavoring to validate new transactions commit sums of crypto to stake as a form of assurance.

If incorrectly validating flawed or fraudulent data, participants may face penalties, risking partial or complete loss of their stake—however, accurate validation of legitimate transactions and data results in earning additional crypto as a reward.

Related Read: Top Crypto Staking Coins To Earn Amazing Rewards In 2024
Related Read: Tax Implications of Crypto Staking, DeFi, and Yield Farming

Benefits of Crypto Staking

• Passive income: Staking offers a primary advantage by generating a consistent passive income stream. Users accrue rewards by holding and staking their coins, similar to earning interest on money in a savings account.
• Energy efficiency: Staking stands out for its superior energy efficiency compared to mining, which demands substantial computational power and energy consumption. In contrast, staking necessitates little more than a stable internet connection and some staked coins.
• Increased security: In Proof-of-Stake systems, the greater the number of coins staked, the more secure the network becomes. This heightened security is due to the significant cost associated with any attempt to attack the network, which requires staked coins.
• Participation in governance: Some blockchains grant stakers the right to participate in network governance. This involvement may include voting on proposed network protocol changes or rules.

Examples of Crypto Staking

• Ethereum 2.0 transitioned from PoW to PoS, allowing users to stake ETH and earn rewards.
• Cardano (ADA) users can stake ADA in various staking pools and
• Polkadot (DOT) holders can participate in the network’s governance and staking mechanisms.

For detailed information on crypto staking, click here.

What is Crypto Restaking?

‘Restaking’ refers to the process of staking an asset again following its initial staking. This practice renders a staked asset available for staking on another program or platform, enhancing the asset’s utility and offering the holder an additional set of rewards, albeit accompanied by increased slashing risks.

Let’s consider Ethereum as an example. The Ethereum blockchain stands out as one of the most secure Proof-of-Stake (PoS) networks, thanks to its multiple validators and the distribution of staked assets among these validators. However, sometimes staked ETH remains inactive on Ethereum, leading to the emergence of liquid staking derivatives. These derivatives transform staked ETH into liquid staked derivative tokens usable in DeFi platforms. Furthermore, liquid staking derivatives do not impose minimum staking requirements, unlike native staking, which demands 32ETH, allowing smaller holders to partake in staking rewards.

Restaking extends this concept further. Restaking protocols enable other decentralized protocols to leverage staked assets on Ethereum to bolster their security. Validators and assets engaged for this purpose receive rewards based on the incentivization terms of the renting protocol or platform. Both validators and nominator stakers earn multiple rewards from the parent Ethereum network and the network or protocol to which they are restaked.

Benefits of Crypto Restaking

• Enhanced Flexibility: Restaking provides traders with enhanced flexibility by allowing the use of staked assets for various financial activities without unstaking. This offers liquidity while maintaining potential rewards, leading to more efficient capital allocation.
• Mitigation of Traditional Staking Limitations: Restaking reduces the opportunity cost of traditional staking, where assets are locked. It enables token holders to access liquidity without losing potential rewards, making staking more appealing to those who value liquidity and flexibility.
• Scalable Security Measures: Restaking allows protocols to adapt their security needs cost-effectively. They can increase security by engaging more validators when needed and reduce it after meeting security requirements and optimizing resources.
• Enhanced Security for Emerging Protocols: Restaking helps emerging protocols by providing access to many validators early on, significantly strengthening their security infrastructure.

Examples of Crypto Restaking

Restaking can involve cross-chain staking, such as using rewards from staking Ethereum (ETH) to stake in networks like Polkadot (DOT) or Cosmos (ATOM). Multi-platform staking services offer integrated solutions that facilitate restaking across different blockchain networks.

For detailed information on crypto restaking, click here.

The above sections discussed the general ideas behind staking and restaking and their benefits. Let’s now quickly examine the key differences between them.

Key Differences Between Staking and Restaking

Concept and Mechanism

• Staking involves locking up a single crypto in a PoS network to earn rewards, while
• Restaking involves reinvesting staking rewards into other staking opportunities, potentially across different networks.

Reward Structure

• In staking, rewards are earned from the initial staked amount.
• In restaking, rewards are compounded by reinvesting them into additional staking opportunities, leading to potentially higher returns.

Complexity

• Staking is generally straightforward, involving a single network and staking process.
• Restaking is more complex, requiring knowledge of multiple networks and strategic reinvestment to maximize returns.

Risk and Diversification

• Staking risk is limited to the staked crypto and the associated network.
• Restaking involves higher risk due to exposure to multiple cryptos and networks but offers better diversification.

Network Support

• Staking supports the security and decentralization of a single blockchain network.
• Restaking enhances support for multiple networks, contributing to the overall robustness of the blockchain ecosystem.

Implications for Investors

Staking is suitable for investors seeking steady passive income with moderate risk. It requires an understanding of the staking process and the specific network’s requirements.

Restaking suits more experienced investors looking to maximize returns through strategic reinvestment and diversification. It requires deeper knowledge of multiple networks, higher risk tolerance, and active management of staking positions.

Conclusion

Crypto staking and restaking are innovative methods for earning passive income in the crypto market. Staking offers a straightforward way to earn rewards by supporting the network’s security and decentralization. Restaking introduces a more advanced strategy, allowing investors to compound their rewards and diversify their portfolios across multiple networks.

While both processes have their unique benefits, the choice between staking and restaking ultimately depends on the investor’s goals, risk tolerance, and level of expertise. By understanding these differences, investors can make more informed decisions and effectively leverage these opportunities to enhance their returns in the dynamic world of cryptos.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.