Staking offers an alternative to trading while also complementing it with the aim of growing one’s crypto holdings. We outline some of the basics of staking for those wanting to start earning.
What is Staking?
Staking is the process of “locking up” or delegating one’s crypto holdings to earn interest in the form of token rewards.
Staking allows investors to earn a form of interest or passive income on their holdings and staking rewards can range widely from as low as 0-2% annual percentage yield (APY) to as high as 15-20%+ APY for different blockchain protocols.
How Staking Works
Similar to depositing money in a traditional bank account, in the blockchain world, a particular network’s protocol locks up an investor’s holdings and the investor agrees not to withdraw it for a set period. In exchange for contributing to the blockchain network, the staker earns rewards.
Blockchains require transactions to be verified and recorded on a public, immutable ledger in a decentralized and trustless manner. So staking helps validate those transactions on the blockchain. Blockchains require their users to validate a new activity and make sure it agrees with a historical record maintained by computers across the network.
For a proof-of-stake (PoS) consensus mechanism, a party mines or validates block transactions according to the amount of coins they hold.
Staking one’s coins helps the blockchain achieve distributed consensus, meaning agreement and confirmation that all of the transaction data adds up to what it should on the public ledger.
In return for contributing to this key upkeep of the blockchain network, the network rewards those investors who stake. The specific reward and other parameters such as minimum amount needed to stake and minimum holding period can differ based on the network — for example, Cardano (ADA) versus Cosmos (ATOM).
Benefits of Staking
Benefits of staking include passive income for the staker, while also promoting the security of the blockchain network.
Some believe that staking also contributes to increased stability of the coin value, since in many instances the staked coins are removed from the circulating supply investors can sell on the open market, but this effect on price is up for debate.
Staking is much less energy-intensive than mining which is required for proof-of-work (PoW) blockchains. Also, the tokens can often be used to govern the blockchain network, meaning investors participating in staking can have a say in governance decisions.
Risks of Staking
Risks of staking can differ depending on the staking rules for each blockchain. Since cryptocurrency prices are fundamentally volatile, investors who keep their holdings staked expose themselves to price volatility risk.
There can also be lock-up periods associated with staking on certain blockchain networks. This means that in some instances, staking means forfeiting the chance to move or sell your staked crypto while it is locked up for months or even years. There may not be a way to unstake your holdings once staking is started, or you may forgo any interest payout if redeeming early. But much depends on the specifics of the blockchain in question and needs to be researched on a case-by-case basis.
If staking outside of an exchange and configuring your own node as a validator, slashing penalties can lead to coins being taken away and reduced if any mistakes are made to punish validators performing poorly.
Staking can also involve fees depending on the method by which it is done. If done through an exchange, fees can be associated in exchange for the service, which can cut into the final staking rewards received.
Popular Staking Tokens
Many popular cryptocurrencies can be staked, especially if they function with a PoS consensus mechanism.
Bitcoin, however, cannot be staked since it uses a different consensus mechanism, PoW, to validate transactions. Still, there are ways to use crypto lending markets to earn interest on Bitcoin and other digital assets, but this is not through staking.
Ethereum — as it moves to a PoS consensus mechanism — allows staking now but requires a minimum of 32 ETH to become a validator.
With Cardano, ADA investors can delegate their ADA to staking pools or can create their own staking pools.
Solana (SOL) can be staked or delegated to a staking pool using a digital wallet that supports this, such as Phantom or SolFlare.
Where to Stake
Staking can be done on any of the popular centralized exchanges such as Coinbase and Kraken, which allow users to stake coins and take small fees for providing the service. The investor will usually have to ‘opt in’ to benefit from staking rewards.
Staking on an exchange may be the easiest staking option for the average investor since exchanges coordinate the validation with the correct infrastructure providers and the user does not have to do any additional work besides opting in to receive rewards. BTSE recently launched a new staking feature under BTSE Earn, to allow users to earn high interest on any of nearly 20 different assets.
In contrast, validators — or users who desire to do the actual validation using their own computer — have the highest requirements of both capital, software, and hardware. There must be care taken to ensure the specific requirements of the blockchain network being validated are understood, and as a tradeoff, the staking rewards are higher for a validator. For example, on the Ethereum network, one would need at least 32 ETH to serve as a validator, which is worth more than $120,000 (at mid-December 2021 prices).
There are also ‘staking-as-a-service’ providers which specialize in staking rather than exchanging.
Delegators — users who delegate, or assign and stake their assets with a validator — can have their assets count towards the stake of the validator in return for a share of the reward received. This is done using smart contracts that automatically split compensation.
If not wishing to be a validator yourself, blockchain networks that support crypto staking typically allow users who own tokens to provide them for other users to deploy in validating transactions and earn a share of the rewards. Users can join staking pools operated by other users additionally in the case of not wanting to trust a centralized exchange to do the staking.
Staking through a pool or an online service or exchange does not carry the full capital requirements of being a validator, nor the hardware requirements.
How to Stake
1. Choose and decide which cryptocurrency to stake and whether you want to be a validator (better for companies or technical enthusiasts) or a delegator (better for most individuals).
2. Learn about the staking requirements of each platform, such as minimum amount, lock-up period, slashing rules, etc.
3. Download the wallet in which to store coins for staking and if choosing to become a validator, acquire the necessary hardware, software, and minimum amount of cryptocurrency needed.
4. For delegators — if being a delegator and delegating your crypto assets to a validator, it is important to know how to correctly choose the best validator for your needs.
5. A more reliable validator can help keep your funds secure and grow them. Some factors in choosing a validator involve percentage uptime, history of flashing, supported networks and years of operation, financial health, governance support, community, and the team.
Staking can be a great way for crypto investors to earn low-risk rewards on their holdings while remaining net long on their crypto assets and growing one’s portfolio. It also provides the chance to get involved in the governance and validation of the blockchain network.
While staking will not make anyone rich overnight, it is certainly a fruitful and low-effort avenue to generate additional returns on your crypto assets, especially if you intend to hold them long-term regardless of market conditions. It can be useful to think of staking as similar to generating interest on cash savings or earning dividends on stock holdings. The payout potential differs with either of them, giving investors yet another long-term option to grow their funds.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.