Crypto staking is a popular method to make passive income. Staking has given one more opportunity to crypto traders to make a profit with their crypto investment. Many crypto traders are confused about staking and want to know what is crypto staking. And how does it work? Or does crypto staking profitable?
Crypto Staking is a process that uses certain cryptocurrencies to verify crypto transactions. This process works through a consensus mechanism that is known as ‘proof of stake.’ This sees blocks of transactions added to a blockchain, an indelible string of “blocks” of transactions, by people who already hold a certain stake in that blockchain’s native currency.
The process is almost similar to crypto mining, used to add blocks to the blockchain of proof-of-work blockchains such as Bitcoin. The difference is, in the case of proof-of-stake blockchains (such as Ethereum and Cardano), the process is called forging (or sometimes “minting”), and the people who do it are called validators or forgers rather than miners.
If you have invested in some proof-of-stake cryptos, you can earn more cryptos in the exchanges for your stake. It will be the specific amount depending on the currency at hand and just how you stake your coins.
What is proof of stake?
Proof of stake is a consensus mechanism for processing transactions and creating new blocks in a blockchain. In the proof-of-stake system, validators process transactions and create new blocks of a blockchain just like miners do in a proof-of-work blockchain (like Bitcoin).
The difference is that to gain the right to create a block, instead of racing to be the first to complete complex mathematical problems like miners do, in the proof-of-stake system, nodes (computers that participate in building the blockchain) do so by setting aside (or “staking”) a certain amount of their holdings.
A validator is then semi-randomly chosen for each block from all those who have staked a minimum amount of coins. After that, this validator creates (forges) the block and other validators validate it. The validator gets a reward for creating the new block in the form of the native coin of the blockchain (e.g. ADA on the Cardano blockchain).
To choose who the next validator to verify the block will be, the proof-of-stake algorithm uses factors including how long the validator has held the stake, how big the stake is, and a sprinkling of randomization. This takes far less computing power and electricity than it takes for the proof-of-work system’s miners to win the right to create a block by being the first to solve a complex math problem.
Which Cryptocurrencies are based on proof-of-stake?
Many popular cryptos use proof-of-stake consensus, including:
- ADA (Cardano),
- SOL (Solana),
- AVAX (Avalanche),
- Polkadot (DOT),
- Cardano (ADA).
Ether’s blockchain Ethereum is also in the process of switching over to a proof-of-stake mechanism by the end of 2022.
Best Crypto Staking Coins
As compared to proof of work like Bitcoin, the concept of proof-of-stake consensus is relatively new. Today, many crypto projects are using proof of stake consensus and some exchanges are making it easier to earn crypto by staking their crypto assets. Here is a list of best proof-of-stake coins, along with annual average yield, expressed as a percentage of the amount of cryptocurrency staked.
1. Ethereum (ETH)
Ethereum (ETH) is today the second most popular cryptocurrency in the market. There is a limit in the Staking Ethereum and you need a minimum of 32 ETH Coins to stake. The profit can vary, but the average rate of return on Ethereum staking is 5-17% per year.
EOS is also one of the popular cryptos that are similar to Ethereum. The EOS tokens are native to the EOS blockchain, and it is also based on proof-of-stake consensus. The EOS can be staked to earn rewards. The expected rate of return for EOS staking is 3.2%.
3. Tezos (XTZ)
Tezos (XTZ) is an open-source blockchain network with its native currency XTZ. The Tezos can be staked on many platforms and networks. The current expected rate of return for Tezos staking is around 6%.
4. Cosmos (ATOM)
Cosmos (ATOM) coins can be also used for staking on various platforms. Currently, Coinbase, Binance, and Kraken support ATOM staking. At the current time, the ATOM staking yields can be around 7% annually.
5. Cardano (ADA)
Cardano is a smart-contract platform like Ethereum. As one of the most popular cryptos, Cardano (ADA) also can be staked on various platforms. Binance supports ADA staking, with yields of up to 24%.
6. Polkadot (DOT)
Polkadot is one of the fastest-growing cryptocurrencies that also works on proof-of-stake consensus and can be used for staking. The Kraken crypto exchange supports staking for DOT. The DOT staking yields around 12% per year.
If you’re planning to stake your crypto assets the above yields may sound high when compared to traditional investments, but the risk is also high. As the coins lose their value your staking coins can also be affected in the same way.
How Crypto Staking Works?
For the investor, crypto staking is a passive activity. When a crypto investor stakes their holdings (in other words, leaves them in their crypto wallet), the network can use those holdings to forge new blocks on the blockchain. The more crypto you’re staking, the better the odds are that your holdings will be selected.
Information is “written” into the new block, and the investor’s holdings are used to validate it. Since coins already have “baked-in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.
Benefits of staking cryptos
There are many benefits to staking cryptos including:
- The potential for high returns (depends on the specific cryptocurrency you’re going to stake).
- The satisfaction of playing a key role in a project you believe in—proof-of-stake currencies simply couldn’t function smoothly without their stakes.
- You don’t need any equipment for staking.
Stake Cryptos in 5 Easy Steps
To start crypto staking, an investor needs to decide where and what they want to stake. Here are five simple steps to start crypto staking:
Step 1: Choose crypto or coin to stake
To begin staking cryptocurrency independently, a user would have to decide which coin they want to stake and buy their cryptocurrency of choice.
Step 2: Learn the minimum staking requirements
Cryptos need a certain amount to stake. For example, if you want to stake ETH you require a minimum of 32 ETH to begin staking.
Step 3: Download the software wallet for the desired coin
Choose and download a crypto wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.
Step 4: Figure out what hardware to use
To stake crypto, users need a constant, uninterrupted internet connection. A standard desktop computer will likely do the job, although a Raspberry Pi might save on electrical costs.
Step 5: Begin staking
Once the hardware has been chosen and the software wallet downloaded, a user can get started staking cryptocurrency.
Types of Crypto Staking
There are many ways to stake cryptos that are much easier than setting up as a validator yourself. These include staking on a cryptocurrency exchange or joining a staking pool.
1. Staking on a cryptocurrency exchange
Staking via a cryptocurrency exchange means that you make your crypto available via an exchange for use in the proof-of-stake process. In essence, it enables holders to monetize their crypto holdings. In this approach, the exchange does much of the administrative work for you, seeking out a node for you to join so you don’t have to do it yourself.
2. Joining a staking pool
A staking pool enables stakers to earn block rewards by sharing their resources, similar to a mining pool. These pools tend to follow a two-tier system, with an administrator overseeing the work of the validators and ensuring things run smoothly. When rewards are earned, they’re split between the pool operator and pool delegators, but some pools do additionally charge entry and membership fees.
Best Crypto Staking Platforms in 2022
If you’re new to crypto staking and want to know about the best staking platform, this guide can be helpful for you. Here we are providing the list of some of the best crypto staking platforms:
- AQRU – The best crypto staking platform with up to 12% interest
- eToro – Popular crypto staking platform with copy trading tools
- Crypto.com – Trusted crypto staking platform with up to 14.5% pa rewards
- Binance – High liquidity crypto staking platform
- Coinbase – Beginner-friendly platform for staking crypto
Risk of Staking Cryptos
There is always some risk with any type of investment and staking is not different. The main risk of staking cryptos is below:
1. Falling cryptocurrency prices
One of the biggest risks with crypto staking is volatility. If you’re earning 20% in rewards for staking an asset but it drops 50% in value throughout the year, you will still make a loss. If you decide to stake, make sure you choose the right cryptocurrency.
2. You may struggle to sell your staking assets
There is no guarantee that you can convert crypto assets back into cash or other coins, as it depends on demand and supply. This affects cryptos with low liquidity on the exchanges. Low liquidity levels mean that market volatility is present, which causes spikes in cryptocurrency prices.
3. Lock-up periods
Some stakable assets come with locked periods during which you can’t access them. If the price of your staked asset drops substantially during the locked period and you can’t unstake it, that would affect your holdings.
4. Waiting period to receive profit
Similar to lockup periods, some staking assets don’t pay out staking rewards daily. It means investors have to wait to receive their rewards. The rates of return on staking rewards are also not always fix and may change over time.
5. Project failure
Before you put cash into any project, you need to make sure you understand it and the risks around it. If the network you choose hits a stumbling block and goes out of business, you will likely lose all of the staked coins. In other words, don’t only consider projects that pay the highest rewards – but also research the fundamentals and technology as well.
6. Minimum holdings
Most projects require you to lock away a minimum holding of your assets to receive the rewards. That’s why it’s key to check the terms and conditions before you sign up. It’s also important to not lock away more than you can afford, despite the minimum holding, as you run the risk of losing it all.
7. Loss or theft
Finally, there is also always the risk that you may lose your funds if you don’t pay enough attention, for example through scams. To avoid it, make sure you never share personal details with strangers. It’s also worth encrypting your online wallet with a strong unique password.
Is Crypto Staking Profitable?
You can’t be rich overnight by staking cryptos but it’s just another method for passive income. Staking rewards are similar to stock dividend payouts. They don’t require a user to do anything other than hold the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater profit they can make.
But unlike dividends, there are a few variables particular to proof-of-stake coins that influence how much of a staking reward user is likely to receive. Users need to find out these factors when searching for the most profitable staking coins:
- The minimum amount of coins
- How big is the block reward is
- The size of the staking pool
- The amount of supply locked
However, during staking cryptos, the fiat currency value of the coin also should be counted. Assuming this value remains steady or rises, staking could potentially be profitable. But if the price of the coin falls, same your profits can have a negative impact.
What is a staking pool?
A staking pool lets you come together with other stakers and combine your resources with others, including others with coins to stake and people with the necessary computing power and technical knowledge to act as validators or run the pool. This will earn you a share of the profit from forging the blocks of a proof-of-stake blockchain.
Which types of cryptocurrencies can be used for staking?
Only cryptocurrencies operating on a proof-of-stake model allow staking like Ethereum and Cardano. You can’t stake proof-of-work based cryptocurrencies, such as Bitcoin.
How much money can I make by staking crypto?
Your earning from crypto staking depends on many factors:
- Which platform you’re using for staking crypto.
- Which cryptocurrency you’re going to stake.
- How much amount of cryptocurrency you’re going to stake
Is crypto staking safe?
No one investment can be 100% risk-free—and crypto staking is no different. While crypto staking has several benefits, there are also some risks. Such as price volatility, struggle to recover assets and lock-up periods. Like crypto investments, a risk analysis is essential before crypto staking.