What exactly is crypto staking?
When users ‘stake’ – or lock up – their crypto assets in order to earn rewards, this is known as crypto staking. Staking requires users to commit their assets to the blockchain in order to validate cryptocurrency transactions and ensure the blockchain’s integrity. It works with cryptocurrencies that validate transactions using a proof-of-stake (PoS) consensus mechanism.
Proof-of-stake protocols are an alternative to proof-of-work protocols (PoW). PoS relies on system users to validate transactions, whereas PoW relies on external miners who compete for the right to validate transactions in order to receive rewards for their efforts. Due to specific networks offering high interest rates for various crypto stakes, staking has become a popular method for users to generate passive income.
How does cryptocurrency staking work?
Staking employs a Proof-of-Stake (PoS) consensus mechanism, which is a method used by blockchains to identify and employ trustworthy users, known as ‘validators’, to validate and authenticate the legitimacy of new blocks.
Validators are compensated for their efforts by receiving the given blockchain’s native cryptocurrency – the more a validator stakes, the more likely they are to earn staking rewards.
There are many flavors of crypto staking, each with its own set of tradeoffs, but the general idea is that users are incentivized to act in the best interests of the blockchain by locking up money that will be destroyed if they act maliciously.
There is no company or centralized authority that controls a crypto network. The network is instead managed by independent operators who set up servers known as ‘validator nodes’.
A validator node on a PoS network can be run by almost anyone. It is not necessary to have a specialized “mining” computer capable of guessing random numbers thousands of times per second. Instead, you can simply use a regular PC to assist with transaction processing.
If you don’t have a powerful enough computer, you can run a PoS node on a cloud computing service such as Amazon Web Services or Microsoft Azure.
When you run a node, you provide a valuable service to the network’s users, and the network rewards you for it by allowing you to mint new coins for yourself each time a set of transactions is completed. These new coins are referred to as your ‘staking reward’.
However, there is one big catch: in order to run a node, you must own a certain minimum amount of the network’s cryptocurrency. In addition, this cryptocurrency must be placed in a special smart contract and kept there until you stop validating.
You must provide a stake to ensure that you are not attempting to commit fraud as a validator.
In a moment, I’ll go over the ‘risks of staking’ section in greater detail. However, if you modify the software to allow it to process fraudulent transactions, you risk losing your entire stake. You may also lose some of your stake if your server is unavailable for an extended period of time and you are unable to process transactions.
As a result, staking exists. It’s essentially collateral that you must provide if you’re a validator in order to provide an assurance that validators will remain honest and reliable.
You need to stake the minimum amount to be a validator.
The greater your stake, the greater your profit.
When you stake more than the minimum amount of cryptocurrency, you are more likely to be chosen to process transactions. This means you’ll get more staking rewards. As a result, the staking rewards are a percentage of the staked amount. The more cryptocurrency you stake, the more cryptocurrency you earn.
Many crypto investors want to earn staking rewards, but they may not want to go through the trouble of setting up a validator node, or they may not have enough crypto to meet the minimum requirement.
This is where delegation comes into play. You can delegate your crypto to someone else’s validator node if you don’t want to, or can’t run your own validator node. The node will charge you a small fee to cover its costs, but the remainder of the rewards generated by your stake will be distributed to you.
Apart from running your own node, delegating is another way to stake your cryptocurrency and earn staking rewards.
I’ve mentioned that staking occurs on PoS networks, but I haven’t defined what that entails. So, in the following section, I’ll explain what PoS is.
Is it profitable to stake cryptocurrency?
Almost always, staking cryptocurrency is more profitable than buying and holding it. When you buy and hold a coin, you can only profit if you sell it later at a higher price. However, if you stake the coin, you can profit from the staking rewards.
Most staking coins pay at least 4% per year in rewards, with some paying up to 14%.
Given that most savings accounts pay only 1% or less, staking crypto provides relatively good returns when compared to other options.
However, there are some risks associated with staking. I’ll go over them shortly.
Staking pools are made up of cryptocurrency assets that are pooled together by multiple users to increase their chances of receiving rewards. For example, on the Ethereum network, pools allow users with less than 32 ETH to participate, so technical knowledge is not required to join a pool.
Before participating in the pool’s staking process, users are usually required to transfer funds into a crypto wallet. When you have enough money, you can join a staking pool and contribute by transferring coins from your crypto wallet.
However, keep in mind that staking pools take a commission on your earnings, so you may not receive your full reward. Some argue that staking pools are too expensive and have too much control over a blockchain.
Crypto exchanges enable you to stake crypto with compatible cryptocurrencies on blockchains that use a PoS consensus mechanism. These stakes will appear as a staking option in your investment portfolio or on a staking page. It’s important to note that some exchanges take a sizable cut of your initial investment. In general, you can learn more about each exchange’s services by visiting their terms of service page.
If you want to run a node, you can also stake crypto yourself. However, adequate resources and technical know-how are required, making it less appealing to many users.
What are the other benefits of crypto-staking?
Aside from passive income and high interest rates, crypto staking provides the following benefits:
- Additional tokens: Crypto stakers and validators can earn additional tokens by creating and verifying new blocks with cryptocurrency rewards. However, this is not guaranteed because rewards are distributed at random.
- Environmentally friendly: Because crypto staking employs a PoS consensus mechanism, it consumes far less energy than PoW models that rely on energy-intensive activities such as mining.
- Networking: Crypto staking allows users to become more involved in the ecosystem of a blockchain. As a result, they directly own and influence crypto through network transactions.
- Growth of holdings: Crypto staking is a relatively simple way to build an investment portfolio, primarily through crypto exchanges. Users can watch their holdings grow as they earn interest once they deposit.
Risks of crypto staking
You lose your entire stake. The most serious risk is that you will lose your entire investment. You could lose everything you’ve invested if you delegate your coins to an untrustworthy validator node. To be fair, losing your stake in this manner is a difficult feat to accomplish. In fact, in all of my research, I have yet to come across a single person who has testified that they lost their entire stake due to a dishonest node. In general, staking nodes do not attempt to commit fraud because it is nearly impossible to succeed. Theoretically, however, if you were to delegate your stake to a malicious node, you could lose it all. As a result, this is one of the crypto pitfalls to avoid.
You lose part of your stake. Another risk of staking is that you may lose some of your cryptocurrency but not all of it. The most obvious cause of this is delegating to a node with faulty equipment or poor internet service. This could also happen if you are a validator who provides poor service. The simplest way to reduce this risk is to either delegate to nodes with a high uptime reputation or run your own node and ensure that you have quality internet.
The value of your cryptocurrency falls. This is the most important concern for the majority of stakeholders. If the price of your cryptocurrency falls faster than your staking rewards pay out, you may be worse off by the time you sell. For example, if you invest in Polkadot (DOT) at a 14.5 percent annual rate of return, but the price falls by 25% during the year, you’ll be 10.5 percent worse off if you sell at the end of the year. Even so, a falling price is a risk with any cryptocurrency investment. As a result, this isn’t a staking-specific risk. Overall, staking is less risky than simply storing cryptocurrency in a wallet.
The top PoS coins
We’ll show you three of the best staking coins, along with their yields and minimum stakes. The yields listed below may fluctuate over time depending on the number of people staking and other factors. As a result, these figures are only intended to provide a rough idea of the yield differences between coins.
Binance Coin (BNB): 8.49% for 30 days, 12.49% for 60 days, or 16.49% for 90 days lockout on staking. A minimum of 10,000 BNB is required to become a validator, plus you have to be one of the top 21 stakers.
Cardano (ADA): 4.6% profit on staking. No minimum set to become a validator, but you’ll be chosen to validate more often if you stake more.
Solana (SOL): 1.47% profit on staking. No minimum set to become a validator, but you’ll be chosen to validate more often if you stake more.
The Best Staking Crypto Wallets
To stake cryptocurrency, you must first withdraw it from your exchange and deposit it into your wallet. However, not all wallets support staking on every network. So, for each network, here are the best staking wallets to use.
We tried to focus on wallets that let you choose your validator and/or have low fees in this list.
Binance Coin: Trustwallet
Solana: SolFlare, Phantom
Cardano: Daedalus, Yoroi and CCVault