Amidst the reports of massive energy usage by Bitcoin mining, crypto staking is starting to emerge as a popular, greener choice for earning crypto passive income rewards.
But what the heck is crypto staking? And how does it make you money?
We’ve put together a concise guide to crypto staking, including how it works, why it matters, and how you can profit from it.
But first a quick dislcaimer: keep in mind that cryptocurrencies are a speculative asset class that involve the risk of loss, including total loss of capital. So invest (and stake) wisely.
What Is Crypto Staking?
Crypto staking is the process of locking up a large amount of crypto to become a validator on a proof-of-stake (PoS) blockchain network.
Instead of “mining” crypto on an energy-intensive proof-of-work (PoW) blockchain (like Bitcoin), crypto staking allows node operators to participate in validating network transactions to secure the network and, in turn, receive crypto rewards.
Crypto staking can be a bit complicated, but the bottom line is that it helps secure a blockchain network while paying rewards to users.
While directly staking requires depositing a substantial amount of crypto on the network, participating in staking rewards does not. In fact, many crypto exchanges and platforms allow users to deposit small amounts in “staking pools” to take part in the crypto rewards.
What Is Proof-of-Stake (PoS)?
Proof-of-Stake (PoS) is a consensus mechanism that is used by a cryptocurrency blockchain network to process and validate transactions. This requires network participants to stake (or lock in) a large amount of crypto to be able to participate in the network.
This staked crypto acts as collateral, proving that the node operator has “skin in the game” and will lose their crypto if they do not uphold their agreement to the network. This also secures the network, as there is less incentive to act maliciously as a validator on the network if doing so causes the price of the crypto to crater, resulting in massive losses for the staked funds.
All of this leads to a more efficient network operation than proof-of-work (PoW) blockchains, and helps create a secure environment for operating blockchain applications and transactions.
PoS node operators are eligible for block rewards, but eligibility is randomized, with greater odds being given to users who stake the most amount of crypto.
Some examples of popular PoS cryptocurrencies are Ethereum 2.0 (ETH), Tezos (XTZ), Cosmos (ATOM), and Cardano (ADA).
How Does Crypto Staking Work?
Crypto staking is the process of depositing crypto as collateral into a smart contract on a proof-of-stake blockchain to become a network validator.
The amount of crypto required to become a network validator varies by project, but is typically a significant amount, showing that the user is heavily invested into the network and can be trusted. For example, Ethereum 2.0 requires 32 Ether (ETH) to be staked to become a validator, which at today’s prices (July 2022) is over $30,000.
For regular investors, staking typically happens on a crypto exchange or platform that allows you to deposit small amounts of crypto into a “staking pool” with other investors. These funds are used by a validator to deposit into the blockchain smart contract and increase their chances of earning block rewards.
The rewards are then evenly distributed to you (the investor) based on how much you deposited.
Can You Make Money Staking Crypto?
Staking allows you to earn rewards based on the amount you have staked, and the rewards distributed to the staking pool you joined. Most crypto exchanges and platforms that offer staking rewards typically distribute payments on a regular schedule, resulting in an annual interest rate of 3% to 7% (or more).
As a validator on a proof-of-stake blockchain, you can earn rewards directly by staking more crypto, as your eligibility for adding blocks increases.
These rewards are typically given on a per-block basis, and new blocks are added regularly.
Rewards can be up to several thousand dollars per block, depending on the asset.
Which Are the Best Cryptocurrencies to Stake?
Staking is available on proof-of-stake blockchains, which many new crypto projects are adopting. The most popular is the upcoming Ethereum 2.0 release, which houses the most DApps (decentralized apps) of any blockchain. As mentioned, staking directly as a validator requires 32 ETH, but many crypto exchanges offer staking pools that let investors deposit much smaller amounts.
Note: The Ethereum 2.0 network upgrade will take several years to complete, and staking ETH will lock in user funds during that time.
Read more: What’s Web 3.0 and Why Should You Care?
Here is a list of other popular staking cryptocurrencies and the minimums needed to become a validator on the network:
- Ethereum 2.0 (ETH). Minimum stake is 32 ETH tokens.
- Polkadot (DOT). Minimum stake is 350 DOT tokens.
- Tezos (XTZ). Minimum stake is 8,000 XTZ tokens.
- Polygon (MATIC). No minimum stake required, but validators’ slots are given to highest stakers.
- Pancake Swap (CAKE). There are no direct staking minimums, but Pancake Swap offers staking pools.
While there are a limited number of validator spots available for each crypto network, you can still earn staking rewards without becoming a validator by joining a staking pool. These pools are available on both centralized and decentralized finance (DeFi) exchanges.
This allows you to deposit small amounts into a pool, which is locked up for a period of time to be used by a validator. You will then earn a percentage of the block rewards based on your contribution.
Where To Stake Crypto
There are several places you can stake your crypto, with centralized exchanges being the most popular (and easiest) option available.
Exchanges like Binance.us and Coinbase offer access to staking pools, which allow you to deposit smaller amounts into a staking contract, and earn a fixed reward. You can purchase crypto directly from the exchange, choose which coin to stake, and lock in your funds on the exchange to earn interest.
Decentralized Apps (DApps)
Some DApps offer staking of the native cryptocurrency of the platform to earn interest.
One example is Sushi.com, which allows users to stake the native SUSHI token to earn interest, as well as collect additional fee rewards. To do this, you can connect your digital wallet to the Sushi platform, choose the amount of SUSHI token you’d like to stake, and deposit your SUSHI tokens into the smart contract.
Utilizing DApps such as Sushi is a more advanced staking strategy, and comes with more risks than a centralized exchange.
Proof-of-Stake Blockchain Network
Finally, if you want to run your own validator node and collect block rewards directly, you can apply to join a proof-of-stake blockchain network that has openings available.
You will need to purchase and stake the minimum amount of crypto needed to run a node, which is typically much higher than joining a staking pool.
Every blockchain offers different requirements for running a node, and this may require purchasing dedicated hardware or running a virtual machine in the cloud.
Pros & Cons of Staking Crypto
- You can earn passive income rewards on deposited crypto.
- Helps secure the blockchain network.
- Easy to do on centralized exchanges.
- No equipment needs when joining a staking pool.
- Proof-of-stake is less energy-intensive than proof-of-work.
- Crypto is volatile, and locking crypto into a staking contract means you can’t sell if the price starts falling.
- Staking contracts may be vulnerable to cyber attacks.
- Withdrawing from staking pools may take up to a week (or more).
If you are a believer in the future of cryptocurrency, staking can be a great way to earn additional crypto rewards instead of just letting your crypto balance sit idle. There are several ways to earn staking rewards, with some being more lucrative than others.
Staking also carries some risks, including the risk of your crypto being locked into a smart contract, giving you no access to it for a period of time (sometimes years!). Staking should be thought of as a long-term investment, but a speculative one.
Overall, staking through a crypto exchange is the easiest (and most flexible) way to earn crypto rewards through staking, but as always, make sure to read up on the terms and conditions before committing your crypto to a staking contract.
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