Staking your cryptocurrency is a lot like earning interest on your deposits in a bank account. Although there are a few differences between the two, the analogy works pretty well for gaining an understanding into this aspect of cryptocurrency.
Cryptocurrency projects that offer staking allow you to earn as much as 20% per year on your holdings. While 20% is quite a high return, an average return is around 5%.
To put that in perspective let’s say a cryptocurrency is offering 10% APY for staking. You can stake $10,000 worth of that crypto and you’ll be paid out $1,000 in free crypto over the course of a year. Just for essentially holding that asset.
Staking is a great addition to the cryptocurrency space for a number of reasons. Staking crypto adds aspects of familiarity, engagement, and reward into the ecosystem, making the investment all the more worthwhile.
How Does Staking Work?
So what is staking in the first place?
Staking is a foundational aspect of proof-of-stake cryptocurrencies (such as Ethereum 2.0, Cardano or Polkadot). These cryptocurrencies secure their networks by getting users to lock up or “stake” their crypto to secure the network. This is counter to proof-of-work cryptocurrencies like Bitcoin that use massively powerful computers running 24/7 to secure their networks.
The people who stake their crypto get rewarded in an annual percentage yield (or APY) that could be anywhere from 4% up to 20% on certain coins.
The idea behind staking is that it’s a democratic way to secure a crypto network and gives users incentives to keep their crypto locked up in order to earn staking rewards.
Two Types of Staking
Broadly speaking, there are two ways to stake: You can delegate or you can validate.
Delegated staking is far easier for the average crypto user and that’s generally what people are referring to when they talk about staking. Being a validator requires a highly technical knowledge of crypto, specialized equipment, a large amount of crypto and rock-solid internet that you’d find at a data center. Therefore it’s usually institutions that act as validators.
Meanwhile when you delegate you are simply locking up your crypto funds with a recognized validator and reaping the rewards with very little effort (in return the validators will take a small percentage of your yield).
With either form of staking, you earn the return on investment in the same asset that you’ve staked. So if you’ve staked Cardano, then you earn your reward in Cardano.
What Cryptocurrencies Can Be Staked?
Proof-of-stake has become the go-to consensus method for cryptocurrencies and nearly every project launched after 2017 offers some form of staking.
It’s almost easier to list the cryptocurrencies that DON’T offer staking. That would include all old-school proof-of-work coins such as Bitcoin, Litecoin, Bitcoin Cash and Dogecoin. That also includes stablecoins, which can earn yield in some circumstances, but not through staking.
Meanwhile here’s a list of the top coins that offer staking:
- Solana (SOL)
- Cardano (ADA)
- Ethereum 2.0 (ETH)
- Avalanche (AVAX)
- Polkadot (DOT)
- Terra (LUNA)
- Binance Coin (BNB)
- Crypto.com (CRO)
- Cosmos (ATOM)
- Tezos (XTZ)
- EOS
Perhaps the project that is getting the most attention on the proof of stake front, is Ethereum. Ethereum is currently a proof of work blockchain. The blockchain is transitioning to proof of stake, meaning anyone can participate in block production, simply by locking up some ETH. You can currently stake ETH but you won’t be able to withdraw it until the launch of ETH 2.0.
What Are the Benefits of Staking?
Do you like generating passive income on a monthly, weekly or even daily basis?
There are plenty of reasons to stake cryptocurrency but for most people the staking rewards will always be first and foremost.
It’s especially useful for investors who just have crypto sitting around. Might as well be earning a yield on that crypto.
Beyond the rewards, there are other good reasons to stake:
- You are helping secure the network.
- Staking helps investors take a long-term approach, which generally pays off in crypto.
- You don’t need any equipment.
- It doesn’t require anywhere near the energy output of mining Bitcoin.
- Staking is a good way to learn about the crypto ecosystem.
Lock-Up Periods
With staking there is almost always a lockup period that you need to be aware of. Generally it can take a few days to regain access to your crypto or even a month.
In extreme cases (such as Ethereum’s transition to ETH 2.0) you are locking up your coins for months or even years.
This is one of the tradeoffs. It doesn’t matter if the market is plunging and you want to get rid of the assets you are staking. You must wait out the duration that you agreed to before regaining access to your funds.
Vesting
Some blockchains use the term “vesting” to refer to the lockup period. Vesting is a term borrowed from the corporate and business world. In the context of cryptocurrency, it is typically used in conjunction with the word period, i.e. “vesting period”.
The vesting period is a duration of time that one needs to wait in order to gain access to their funds. Sometimes this is also referred to as a “warming up” or “cooling down” period.
Staking Services
Some services exist that take out the technical complexity with staking your coins on a proof of stake blockchain. They simply automate the technical process of initiating the staking mechanism.
Since proof of stake is relatively new to the world, it is still a technically involved process that requires some technical expertise to initiate. Some projects make the process super simple, by adding specialized buttons directly into their core wallet. Other projects haven’t built user interfaces to simplify the process, creating the need for staking service providers.
You can even stake using a cryptocurrency exchange like one of the following:
There are also numerous wallets that offer support for staking inside the wallet:
Is Earning Interest on BlockFi the Same as Staking?
Blockfi and similar services are actually what’s called “crypto lenders“.
The main difference between lending and staking, is that you give up direct access to your funds, often to earn a higher rate of return.
Various lending services such as BlockFi, Nexo, or Crypto.com connect lenders with borrowers, and earn their margins in between. You deposit your funds into their custodial wallet, and earn an agreed-upon rate of return. Most times, these services make you lock up your cryptocurrency for a predetermined amount of time.
With lending, you are not restricted by the blockchain needing to be proof of stake. You can lend any asset that the lending services wants to offer to borrowers. This is a major perk of lending out your assets. For example, you may be very bullish on bitcoin, and want to earn interest on the base amount of bitcoin you own. You won’t be able to do this in a decentralized fashion, as bitcoin is not proof of stake. You may however, choose to revoke your access to the bitcoin to a lender, that will give you a guaranteed rate of return. Be careful though, if a rate seems too good to be true, it probably is. Make sure you check the legitimacy, and reputation of the lender, before depositing your assets on their services. For example, Crypto.com has insurance in case of loss of funds, or a hack. Therefore, they might be a sensible choice for a lending provider.
What Are the Risks of Staking?
Staking is actually extremely safe, provided you pick a reputable service to help stake your crypto.
There are plenty of stories of new crypto users going to the wrong website, entering their recovery phrase, and getting scammed out of their crypto. You should always double check the URL of the website you are visiting.
There are also plenty of fake crypto apps on both Apple and Android so be on the lookout for numerous reviews and make sure the proper company is behind the service.
Once you’re actually staking it’s very safe. You still retain your private keys. Occasionally crypto validators are hit with penalties when they fail to validate a certain block but that would only affect your rewards, not your principal amount.
Of course one of the biggest criticisms of staking is that crypto is notoriously volatile and if a crypto is going up by 40% or down by 30% it can make a 4% APY seem fairly irrelevant.
Staking Summary
Staking is a lot like having a savings account with your bank. The banks allow you to earn a percent of your holdings on a typical savings account. This is because banks are actually lending your money behind the scenes. The interest rate that they give you is their way of compensating you for keeping your money in their bank.
The concepts of staking are therefore not that foreign to everyday individuals. The world of cryptocurrency tends to create new terms for old concepts. Here at CryptoVantage, we like to make sure you understand that the world of crypto is just updating the world of finance. Simply put: staking is saving.
