Staking has become one of the preferred ways to earn money from cryptocurrencies. It carries significantly less risks than investing or trading and is relatively easy to do. Anyone who owns cryptocurrencies can invest them in pools and make significant returns rather than simple keep them in hot or cold storage. There are plenty of cryptocurrencies that you can stake (more on that later) and platforms that offer considerable returns.
Of course, if you’re just starting out your crypto, you want to know the answer to the big questions. What is staking crypto? How do you stake cryptocurrency? Is it profitable? Is it risky? How is it different than investing or trading?
This guide will cover all of that to give readers a good understanding of what crypto staking is. Most people start looking into crypto after they have dabbled in stocks, commodities, real estate, FOREX or active trading for a while. But after the 2017 wave, there are more ‘regular Joes’ turning to digital assets than before. With this in mind, crypto investing and trading is out of reach for most users since the price of bitcoin skyrocketed in 2021 but crypto staking remains a viable alternative to earn from.
Now, with a bit of background on the crypto segment, let’s dive into the specifics.
Staking Defined
Staking is a term that describes the act of pledging your crypto-assets to a cryptocurrency protocol to earn rewards in exchange. This is pretty similar to the profit banks generate from the funds of its clients. When people deposit their money into their accounts, the the bank uses that money to give loans to other people and businesses to whom they charge interest. Crypto staking works similarly in the sense that you ‘hand’ your crypto assets to an exchange, a staking pool or a protocol. The reason behind allowing staking is to let users participate in securing the network (the blockchain on which the staked cryptocurrency functions) by locking up a set amount of said cryptocurrency. When doing so, users are rewarded for securing the network in the form of the native tokens of the respective blockchain.
The higher the amount of crypto-assets you pledge, the more rewards you receive. These rewards are distributed on-chain, which means the process of earning more crypto is completely automatic. All you have to do is to stake them. This means your crypto-assets generate a passive income just like stocks and other investments would.
It is worth pointing out that some decentralized exchanges do take one step further and use the staked crypto to allow leveraged trading for users (and making a profit just like banks do). But this is besides the original point of staking, which is to ensure the security of the network for all participants. The core of decentralization that blockchain promises.
A crucial part of staking crypto is that it only works for cryptocurrencies that use Proof-of-Stake consensus method. To understand what this means, let’s look at what blockchains are and how they operate.
Proof-of-Stake (PoS) vs. Proof-of-Work (PoW)
In its simplest form, blockchain works by allowing digital information to be distributed rather than copied and reproduced across hundreds of thousands of participants. This creates the backbone of a new type of internet.
The blockchain is made of a network of so-called computing “nodes”. Think of a node as an “administrator” of the blockchain, where it joins the network voluntarily (in this sense, the network is decentralized). Each one has a reason or “an incentive” for participating in the network and that incentive is earning cryptocurrency. There are two ways to do that depending on the consensus algorithm that the network uses.
If the network uses Proof-of-Work (PoW), then each “node” mines cryptocurrency, but the term is something of a misnomer. In fact, each node is competing to win cryptocurrency by solving computational puzzles. Bitcoin is the best example of a PoW model and the original blockchain consensus algorithm. But it also turned out it is incredible energy-inefficient and cumbersome for participating nodes.
Thus, Proof-of-Stake (PoS) came to be.
Proof of stake allows coin holders to validate transactions, rather than mining operators. The protocol then randomly grants one of them the right to validate the next block at unique intervals. The higher the number of staked coins the higher chance of getting chosen. This brings more fairness to the decentralized nature of blockchain because the people who have the most assets locked up (invested) in the network have the most vested interest in maintaining it and helping it grow. For which, they are, in turn, rewarded with more crypto, creating a fair decentralized economy.
How to Stake Crypto
There are several ways to stake Proof-of-Work cryptocurrencies. As you get more comfortable with staking crypto, you can start using several or all of them and find out what yields the best returns. The most popular are:
Crypto Exchanges: Most major crypto exchanges allow users to stake crypto and earn rewards. The percentages you earn when staking crypto on an exchange are quite attractive but the payout is not without its risks. Because the exchanges usually invest in cryptocurrency on their consumers’ behalf there is a chance (albeit small) that they lose it all. Most exchanges apply a commission on customers’ staking rewards and offer higher payouts on lesser know coins. For example staking cryptocurrencies like AXS, SHIB, AVAX, NEAR, LUNA, ADA, and MATIC on Binance will result in 104.62 percent APY.
Liquidity Pools: There are so-called “staking pools” run by other users you can join and lock your crypto to collect incentives. Usually, you can transfer and lock funds for a set amount of time by connecting a crypto wallet to the validator’s pool. However, many people have been burnt after joining pools that shut down or turned out to be scams so be sure to verify the validity of these pools before transferring tokens.
Node Validators: Validators are software programs hosted on a server that check transactions to guarantee the network’s security. Their job is to validate transactions and ensure the ledger’s health and trust. In turn, they are compensated with crypto coins but each time they validate a transaction. You can become a validator and obtain staking incentives but the process is more complicated. Furthermore, being a validator necessitates a significant amount of coins to stake (for example, validators on the Ethereum networks must stake a minimum of 32 ETH).
What are the Advantages of Staking
Staking has numerous benefits that are hard to overlook. First, the more that is staked, the more you earn in rewards because the chance of your node being chosen as a validator increases. This essentially allows you to invest in a promising cryptocurrency, and earn passive income.
Given the vast number of PoS cryptocurrencies, there are plenty of options for staking crypto with different ROIs. Every Proof of stake network has its own staking currency. By staking crypto you are directly contributing to increased scalability and security of the network. Since there is no limit to how many pools, exchanges or validators you use, you can stake as many coins as you want.
Popular Cryptocurrencies for Staking
As previously mentioned, not all cryptocurrencies offer staking. You need to find a cryptocurrency that validates transactions via PoS. There are several major cryptocurrencies you can stake:
Ethereum (ETH) was the first cryptocurrency with a programmable blockchain for developers to build apps on. Interestingly, Ethereum initially used proof of work, but announced an upgrade in 2021 that saw it transition to a proof-of-stake model.
Cardano (ADA) is an eco-friendly cryptocurrency. It started its path as peer-reviewed research and grew through evidence-based methods.
Polkadot (DOT) is a protocol that allows different blockchains to connect and work with one another.
Solana (SOL) is a blockchain designed for scalability and considered to give Ethereum a run for its reputation because it offers similar functionality with significant improvements. Namely, faster and cheaper transactions and ample Dapp development capacity.
There are many other cryptorurrencies you can stake but it will be a challenge to list all of them. You can look through crypto exchanges to see what they offer and what their staking rewards, and the staking process look like.
What is Cold Staking
If you don’t feel like you can entrust your hard-earned crypto with another party but still want to stake it there is a fourth option. It’s called cold staking and requires the use of a cold or hardware wallet. This is a USB device you store your crypto on to ensure no one can hack your computer and steal it. Since there is no connection to the internet it is called a cold wallet. Most networks support crypto staking in the cold storage or you can use an air-gapped software wallet. One of the major advantages of cold staking is that the funds are completely safe and secure. And that is hard to beat.
You basically get all the benefits of staking crypto but none of the risks. The only downside is that you will lose your rewards if you take the crypto out of the cold wallet. But as long as it stays there, you will keep on receiving a string of passive income.
A Final Word
It’s fair to say that staking crypto is a more popular way of getting into a segment that many view as overly technical and complicated. While staking can’t compete with trading crypto when it comes to potential returns, it is considerably safer and easier for the everyday crypto user. Think of staking as halfway between the domain of digital assets and the good, old-fashioned savings account at a bank. The funds are locked for a set amount of time, they generate consistent yields and if you withdraw them earlier – you lose the accumulated interest (or rewards, in this case).
Staking crypto creates more opportunities for anyone who wants to be a part of the blockchain phenomenon and profit while doing it. Not to mention – an easy way to earn passive income by doing nothing more than holding cryptocurrency.