Guide to Crypto Staking: What it is, How it works, and How to Get Started
Everything You Need To Know About Crypto Staking
Generally, when investors contemplate investing in cryptocurrencies, they think about either mining crypto or purchasing it outright on a crypto exchange. But crypto staking — or staking coins, as it’s often called — is another viable alternative for the crypto-curious to get assets in their crypto wallets.
While “staking” may be a relatively new addition to the financial lexicon, it’s important for those interested in crypto investing to understand what it is, how it works, and what cryptocurrencies it can be used to obtain.
What is Staking in Crypto?
Crypto staking is the process of locking up crypto holdings to obtain rewards or earn interest. Cryptocurrencies are built with blockchain technology, in which crypto transactions are verified, and the resulting data is stored on the blockchain. Staking is another way to describe validating those transactions on a blockchain.
Depending on the types of cryptocurrency you’re working with and its supporting technologies, these validation processes are called “proof-of-stake” or “proof-of-work.” Each of these processes helps crypto networks achieve consensus or confirmation that all of the transaction data adds up to what it should.
But achieving that consensus requires participants. That’s what staking is — investors who actively hold onto, or lock up their crypto holdings in their crypto wallet are participating in these networks’ consensus-taking processes. Stakers are, in essence, approving and verifying transactions on the blockchain.
For doing so, the networks reward those investors. The specific rewards will depend on the network.
It may be helpful to think of crypto staking as similar to depositing cash in a savings account. The depositor earns interest on their money while it’s in the bank, as a reward from the bank, who uses the money for other purposes (lending, etc.). Staking coins is, then, similar to earning interest.
How Crypto Staking Works?
For the investor, crypto staking is a passive activity. When a crypto investor stakes their holdings (in other words, leaves them in their crypto wallet), the network can use those holdings to forge new blocks on the blockchain. The more crypto you’re staking, the better the odds are that your holdings will be selected.
Information is “written” into the new block, and the investor’s holdings are used to validate it. Since coins already have “baked in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.
Benefits of Staking:
There are many benefits and rewards to staking. Here are some of the most prominent:
You can earn additional tokens.
This is the big one — increasing your stash of tokens or coins. Stakers aren’t guaranteed anything, as the process of forging new blocks and doling out rewards is randomized, but stakers do earn interest by staking.
Staking is less resource-intensive.
As opposed to crypto mining, staking consumes far fewer resources, which may help you sleep at night. Plus, staking is servicing the ecosystem by making tokens rarer which can increase the value of your holdings.
Stakers get voting rights and participation.
As mentioned, stakers are more entrenched in a specific ecosystem or blockchain network, which may give them more clout as to what happens next with a specific cryptocurrency. It’s similar to owning stock in a company. By staking, you’re getting voting rights.
Staking can be an easy way to grow holdings.
For investors using an exchange, staking can be as easy as toggling a few switches to set things up. From there, they can watch their holdings grow. It’s a hands-off, easy way to keep investing while putting in very little effort.
Risks of staking:
As with any type of investment, staking has its risks. There are some things to be aware of before you start staking.
Crypto is volatile.
First and foremost, cryptocurrency is a volatile investment, and as such, price swings are common. The volatile nature of crypto and corresponding price swings can have you rethinking your strategy daily — so, volatility is something to keep in mind.
There are lock-up periods.
Staking involves locking up your funds for some time, and if you lock up your holdings for months (or years), you won’t have access to them for some time. Also important: There may not be a way to “unstake” your holdings once you start.
Beware of slashing.
If you’re staking outside of an exchange, by setting up and configuring your node, you may make a mistake and incur penalties. This is called slashing and is used against validators that are performing poorly or dishonestly. A portion of the funds can be taken as a penalty.
You’ll have to pay fees.
Yes, there are fees associated with staking, particularly if you do so through an exchange. The fees vary by exchange, but they’re typically a percentage of a staker’s rewards.
Popular Crypto Staking Coins:
Just a few years ago, the entire concept of proof-of-stake consensus was still relatively new, and options for staking coins were few and far between.
Today in 2021, a growing number of projects are utilizing PoS and some exchanges are making it easier than ever for users to earn crypto by staking their coins.
Here is a list of common proof-of-stake coins, along with annual average yield, expressed as a percentage of the amount of cryptocurrency staked.
1. Ethereum (ETH):
Ethereum (ETH) has become one of the most popular cryptocurrencies on the market — although it is not exactly a cryptocurrency itself. Staking Ethereum on your own will require a minimum of 32 ETH. Rewards vary, but it’s expected that the rate of return on Ethereum staking is 5–17% per year.
2. EOS:
EOS is similar to Ethereum in that it’s used to support decentralized programs. EOS tokens are native to the EOS blockchain, and like other cryptos, can be staked to earn rewards. As of late April 2021, the expected rate of return for EOS staking is 3.2%.
3. Tezos (XTZ):
Like EOS and Ethereum, Tezos (XTZ) is an open-source blockchain network with its native currency, with a symbol of XTZ. And it, too, can be staked on certain platforms and networks. The current expected rate of return for Tezos staking is around 6%.
4. Cosmos (ATOM):
Cosmos (ATOM) calls itself the “internet of blockchains.” The team behind the project hopes to bring different blockchains together, allowing them to transact with one another. This idea is known as “interoperability.”
Coinbase, Binance, and Kraken support ATOM staking.
At the time of writing in mid-2021, ATOM staking yields about 7% annually.
5. Cardano (ADA):
Cardano is a smart-contract platform much like Ethereum. But Cardano is a multi-layered platform, with one later for the transaction of the ADA coin (the digital currency that fuels the Cardano proof-of-stake network) and another layer for the development of decentralized applications (dApps).
Cardano prides itself on using scientifically tested theories based on peer-reviewed research for its development.
Binance supports ADA staking, with yields of up to 24% at the time of writing in mid-2021.
6. Polkadot (DOT):
Polkadot is a newer cryptocurrency, created in August 2020. Similar to Cosmos, Polkadot hopes to provide interoperability and is designed to support “parachains,” or different blockchains created by different developers.
The Kraken crypto exchange supports staking for DOT.
At the time of writing in mid-2021, DOT staking yields about 12% annually.
Investors would do well to remember that while these above yields may sound high when compared to traditional financial markets, the risk is also quite high, as the coins could quickly lose value.
How to Stake Crypto in 5 Steps:
To start crypto staking, an investor needs to cide where and what they want to stake. Here are five simple steps to get started.
Step 1: Choose crypto or coin to stake.
To begin staking cryptocurrency independently, a user would have to decide which coin they want to stake and buy their cryptocurrency of choice.
Step 2: Learn the minimum staking requirements.
ETH, for example, requires a minimum of 32 ETH (worth about $47,000 at the time of writing) for users to begin staking.
Step 3: Download the software wallet for the desired coin.
Choose and download a crypto wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.
Step 4: Figure out what hardware to use.
To stake crypto, users need a constant, uninterrupted internet connection. A standard desktop computer will likely do the job, although a Raspberry Pi might save on electrical costs.
Step 5: Begin staking.
Once the hardware has been chosen and the numerous platforms allow get started staking cryptocurrency.
Where to Stake Crypto?
Numerous platforms allow users to start staking coins, and quickly.
There are big-name platforms that most crypto investors are probably familiar with, includinintonbase and touch allow users to stake coins. On exstakes like these, investors must opt into staking to benefit from rewards.
Enterprising stakes could also look at “staking-as-a-service” providers — which specialize in staking, rather than exchanging. Examples of those platforms include MyContainer, Stake Capital, and Staked.
It’s important to note that each of these platforms will have different offerings, rules, and fees. It’s worth the time spent researching a few to make sure your goals align with a certain platform before you jump in.
Is Crypto Staking Profitable?
Anyone can earn crypto by staking cryptocurrency. But unless someone is sitting on a huge stash of proof-of-stake coins, they’re not likely to get rich from staking.
Staking rewards are similar to stock dividend payholdn that both are a form of passive income. They don’t require a user to do anything other than hold the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater profit potential there will be in general.
But unlike taking reward users a few variables particular to proof-of-stake coins influence how much of staking reward users are likely to receive. Users would do well to research these factors and more when searching for the most profitable staking coins:
• How big the block reward is.
• The size of the staking pool.
• The amount of supply locked.
Additionally, the fiat currency value of the coin being staked must also be taken into account. Assuming this value remains steady or rises, staking could potentially be profitable. But if the price of the coin falls, profits could diminish quickly.