Staking is a concept that exists in both traditional finance and cryptocurrency. In traditional finance, staking refers to depositing money into an account to earn interest. The interest rate is typically low, but it can be a way to earn some passive income on your savings.
However, in cryptocurrency, staking refers to the process of locking up cryptocurrency tokens to participate in the validation of transactions on a blockchain network. In return for validating such transactions, stakers are rewarded with new tokens.
The amount of rewards you earn from staking will depend on several factors, such as the amount of coins or tokens you stake, the length of time you stake them, and the overall health of the blockchain network. Such staking rewards are typically paid out regularly, such as monthly or quarterly.
In this article, we will help you understand the process of staking and how you can stake crypto while analysing the benefits of staking.
Before we start explaining the steps on how you can stake crypto, let’s first understand the staking process.
The staking feature is available for cryptocurrencies that use Proof of Stake as the consensus mechanism. It means staking is done to verify the transaction and secure the blockchain.
Now, the protocol on which you are staking automatically selects validators to verify the transactions and add blocks to the blockchain according to the amount of crypto you have staked. If you have staked a high amount, you may become a validator in the protocol.
For example, in the Ethereum network, if you want to become a node owner, you must stake or deposit 32 ETH in the network, and then you can validate transactions.
However, if you don’t stake a high amount, you may earn very little in rewards or even no rewards at all. This is because the competition for being chosen as a validator is higher when there are more stakers.
Now, if you are not able to stake a higher amount and become a validator, you can enjoy the staking rewards with delegated staking or staking as a service. With delegated staking, you delegate your coins or tokens to a validator, who will stake them on your behalf. You will still earn staking rewards but will not be responsible for verifying transactions or adding new blocks to the chain.
On the other hand, with staking as a service, a third-party provider takes care of everything for you. They will set up a validator node, stake your coins or tokens, and manage the node on your behalf. You will still earn staking rewards but not have to do anything yourself.
Additionally, to understand how stakers are rewarded, you must know the mechanism through which new transactions are added to the blockchain. Before adding blocks to the chain, the transactions are validated by the participant selected by the protocol. After verification, new transactions are added to the network, and a percentage of the transaction fee, along with the newly minted coin, is given to the validator.
How To Get Started With Staking?
Let’s now see how you can start staking cryptocurrencies.
1. Buy a cryptocurrency that uses Proof of Stake
You can enjoy the staking feature in cryptocurrencies that work on the Proof of Stake model. Another commonly used consensus mechanism, Proof of Work, demands high energy consumption and raises environmental concerns.
Compared to this, the PoS model is more energy efficient because PoS does not require miners to compete to solve computationally difficult puzzles. Additionally, PoS networks are less vulnerable to attacks than PoW networks, as it is more difficult to attack a network where validators are randomly selected.
Moreover, PoS networks are more scalable than PoW networks because they do not require all nodes to participate in mining.
Here are some popular cryptocurrencies you can stake:
- Ethereum– ETH is the most popular cryptocurrency when it comes to staking. Under its upgradation as Ethereum 2.0, the network is moving to PoS from PoW to enhance scalability, security, and sustainability. You can solo stake in the network by locking 32 ETH, or you can go with staking in the pool, exchange staking, or delegating your ETH.
- Solana– Solana is a high-performance blockchain that uses PoS to achieve high throughput and low transaction fees. SOL holders can stake their coins to earn rewards and help secure the Solana network.
- Avalanche– Avalanche is a scalable and secure blockchain that uses PoS to achieve high throughput and low latency. AVAX holders can stake their coins to earn rewards and help secure the Avalanche network.
- Polkadot– Polkadot is a multi-chain blockchain platform that aims to enable different blockchains to connect efficiently and share information. DOT is a cryptocurrency that uses the PoS model to address the blockchain’s scalability, interoperability, and governance issues.
- Cardano– Cardano is one of the most popular crypto projects that aims to provide a sustainable infrastructure for decentralised applications and smart contracts. ADA, the native coin of the project, is used for transactions, staking, governance, and smart contracts.
2. Transfer your Crypto to a Blockchain Wallet
Once you have bought a crypto to stake, you will need a wallet that supports the coin you want to stake and allows you to interact with the network. Some wallets, such as Ledger, Trezor, Exodus, or Atomic Wallet, are dedicated to staking. Others are integrated with staking platforms, such as Coinbase, Binance, Kraken, or Huobi.
Ensure you choose a secure, user-friendly, and compatible wallet.
3. Join a staking pool
If you want to solo stake, you will need more coins because the minimum locking amount of crypto is usually high. So, most investors prefer to join a staking pool. This way, the chances of the pool being the validator increase, and every participant is rewarded according to the yield percentage calculated in the pool.
Note: While selecting a staking pool, ensure the pool servers are active 24/7 and have low fees.
Evaluating Staking Yield
While staking, you must understand the factors influencing the staking process and rewards. The elements can include the reliability of the network and its overall activity—also the amount you have staked and the duration of the staking period.
In case you are staking solo, you must stake a certain amount. Otherwise, you must choose a reliable validator (pool) where you can stake your crypto. Additionally, it is advised that while trying to stake crypto, seek sustainable yield rather than staking to the highest yield rate. Chasing the most elevated rate may be risky and lead to network issues.
Benefits of Staking
Let’s explore the benefits of staking cryptocurrencies:
- Passive income– Staking can be a great way of earning passive income through crypto. Unlike trading and investing, staking is considered less risky, and the process is relatively easy when you get experience. Moreover, staking will allow you to gain consistent and high returns when you stake for the long term.
- Energy efficiency and scalability– Unlike cryptocurrencies with Proof of Work consensus mechanisms with huge energy consumption, Proof of stake based cryptocurrencies are more energy efficient. PoS-based crypto does not need heavy-duty hardware and other expensive equipment but is more scalable than PoW-based cryptos.
- Supporting network security- Through staking, you will be part of the essential network to secure and maintain the blockchain. Additionally, it does not give rise to environmental concerns when engaged in staking.
Staking can be a great way of earning consistent returns in cryptocurrencies. An average long-term investment in staking can yield returns up to 5% to 14% per year. While you can start staking small to get more experience in the dynamics of crypto staking, remember that you must stake your coins for long periods to earn sizeable rewards.
Also, remember that staking profits are subject to taxes in many countries and can be complex to understand. Therefore, you can use KoinX, an automated crypto taxation platform, to understand your tax obligations and seamlessly calculate all the taxes related to staking and other crypto activities.