Crypto staking has been gaining popularity.
It offers users a chance to generate passive income from their digital assets while contributing to the decentralized network they’re a part of.
In recent years, this method of validating transactions on blockchain networks has become more popular.
How Does Crypto Staking Work?
Crypto staking is a process to verify transactions on a blockchain network.
On these networks, users can put some of their tokens in a special pool.
This pool is part of the process of verifying each transaction on the network.
In this way, assets are at stake.
If users act in good faith, they are rewarded with freshly minted tokens and if they act in bad faith, their stake is lost or destroyed.
This process is known as Proof-of-Stake (PoS) and it replaces the traditional Proof-of-Work (PoW) mining process that powers older blockchain networks such as Bitcoin.
PoS aligns the incentives of all users within a decentralized network without the need for an intermediary.
The algorithm baked into the blockchain network allows users to become “validators” by meeting the minimum required stake.
These validator nodes automatically verify every transaction on the network and generate new blocks to add to the chain.
The algorithm also determines the reward offered to these validators for their efforts.
The rate of reward is meant to balance the supply of new tokens on the network and the incentives required to put digital assets at stake.
Pros of Staking
There are several advantages of staking.
The process unlocks the value of digital assets within a network.
Users can stake their assets and generate passive income instead of keeping them dormant in a digital wallet.
In other words, it puts digital assets to productive use.
These rewards enhance the intrinsic value of the network.
Put simply, the opportunity to generate passive income is attractive to investors, which makes each token more valuable.
Staking is also more accessible than traditional crypto mining.
In recent years, the barriers to entry for Bitcoin mining have skyrocketed.
The average mining rig could cost anywhere from $3,000 to $10,000 and would be competing with industrial-grade mining firms that enjoy economies of scale.
By comparison, staking simply requires the user to deposit a minimum number of tokens in a designated wallet.
If they can’t meet the minimum requirement, they can pool their assets with others on the network to start staking and earning rewards.
Cons of Staking
PoS blockchain networks require users to lock up their digital assets for a fixed duration.
This means users who have staked their tokens may not have access to them or the ability to transfer them for a period of time.
Users also need to be aware of all the rules and protocols of the network they hope to stake on.
Not following the rules could result in assets being lost.
For instance, users could lose a portion of their stake if they fail to validate a transaction or engage in collusion with other members of the network.
Some critics of the PoS model have argued that it’s less egalitarian and open than PoW.
Traditional PoS is open to anyone, anywhere who can buy the right equipment and download the right software to get started.
Mining is decentralized based on computing power whereas a PoS model favors those with the deepest pockets.
Wealthier investors or earlier adopters have an outsized influence on PoS networks.
How to Stake Your Crypto
Every blockchain network has a unique staking protocol.
However, the basic framework tends to be similar.
To stake your crypto assets, you generally need to follow these steps.
1. Choose the right token
Not all crypto assets are based on the PoS model.
Additionally, some assets are trying to transition from PoS to PoW or have not fully implemented the new model yet.
This is why it’s important to start with basic research on the network’s consensus mechanism.
Finding the right coin or token before you get started is essential.
2. Learn about the network’s minimum requirements and rules
Once you’ve verified that the token is based on the PoS model, you must read the official documentation about the rules and requirements for staking.
Ethereum’s staking process, for example, requires a minimum deposit of 32 ETH to get started.
3. Download the software wallet
Most PoS crypto networks have an official software wallet that allows users to stake their tokens.
It’s essential that you find the right wallet and verify its authenticity before proceeding.
4. Find the right hardware
Some PoS networks require stakers to have a validator node connected to the internet and active around the clock.
This means you might need a dedicated device that meets the minimum requirements of the network’s staking protocol.
A Raspberry Pi, for instance, is suitable for some networks.
5. Begin staking
Once you have the right software and hardware, you can begin staking by depositing the minimum required digital assets.
Optional: Pick a Staking Pool
If you do not have the hardware for an active validator node or the minimum deposit required to start staking, you could pick a staking pool.
These pools aggregate digital assets from users and delegate the responsibilities to a trusted manager.
RocketPool on the Ethereum network is a good example of this strategy in action.
How Much Money Can I Earn From Staking?
The rate of return or yield from staking depends on market conditions and the network.
Some networks are less popular and less competitive, which increases the yield.
The Polkadot network, for instance, offers a 14.7% nominal yield at the moment, Meanwhile, the much bigger and more popular Ethereum network offers a 5% nominal yield right now.
To calculate your total yield, you may have to consider other factors such as the network’s rate of inflation and price volatility.
An online platform like Staked should help you keep track of the yields you can expect from various networks.
Risks to Consider When Staking Crypto
Users must recognize that staking crypto isn’t a risk-free source of passive income.
Digital assets are volatile, which means there is a risk of suffering a paper loss while your assets are held in a lock-up period.
There’s also the risk of a validator error, a cyberattack on the network’s staking pools, or volatility in the costs of running a validator node.
Frequently Asked Questions
- Is staking crypto worth it?
Whether or not staking is worth it depends on your risk profile and investment objectives. If you’re looking for a low-risk passive income opportunity with stable and predictable returns, there could be better alternatives than crypto staking. On the other hand, if you’re an active crypto investor with a sizable portfolio, staking could allow you to boost returns on your existing digital assets.
- Is staking crypto profitable?
In nominal terms, staking crypto does provide a return on investment. However, whether this return is profitable depends on a number of factors. Most importantly, the payouts are in the digital asset that is being staked. This means your actual return could be low if the digital asset’s value plummets during your stake. Users must also consider the rate of inflation of these digital assets to determine the true yield. Solana, for instance, has an annual inflation rate of 4.3%, which effectively reduces the real yield of staking SOL.
- What is the best coin to stake?
The best coin to stake depends on your investment objectives and appetite for risk. Mainstream cryptocurrencies such as Ether could be a better bet for conservative investors looking for a safer return. Meanwhile, other assets like NuCypher offer double-digit returns that have been ranging from 40% to 50% annually. Usually, these higher yields indicate more volatility and risk for investors. It’s best to keep an eye on these factors while picking a coin to stake.