With the rise of the mighty DeFi and its applications, more and more people are attracted by the exciting opportunities it has to offer. Cryptocurrency staking is one of these awesome opportunities.
In this guide, I will go through all there is to know about cryptocurrency staking, from how it works, to how you can use it as a source of passive income.
What is cryptocurrency staking
Staking is a mechanism used to incentivize or repay the owner of a cryptocurrency for validating transactions. The crypto owner that chooses to stake has to basically “lock” his coins into the network in exchange for a decent yearly return. On top of that, he also receives voting rights on future decisions related to that network.
How does crypto staking work
Cryptocurrency staking is made possible by a Proof-Of-Stake consensus protocol. This protocol (or set of rules) ensures that new blocks containing one or more transactions are correctly added to a blockchain. Proof-of-Stake (PoS) allows a person to mine or validate new transactions based on the number of coins that person is holding.
With PoS, it is not necessarily required to own or use specialized mining hardware, such as graphic cards or ASICs, in order to become a validator (a new and fancier term for “miner”). This was the case for the older Proof-of-Work protocol, used by for example by Bitcoin, where miners were rewarded based on the amount of energy they “burned” for mining blocks. Therefore, PoS is therefore a much more energy-efficient blockchain protocol than PoW. It is also seen as more secure, more scalable, and more resistant to centralization.
Sounds too complex? Okay, I will explain how cryptocurrency staking works through a more practical example.
Let’s say you just bought 100 Elrond (EGLD) coins on Binance and you plan to hold them for at least a few years. Since you are not using the coins for trading and don’t want to spend them anytime soon, you decide it would be wise to put them to work. Good thing that Elrond is a cryptocurrency that supports staking.
Checking this website, you notice that the current annual percentage yield (APY) is 12.78% for delegating your coins to a staking pool. Also, they have a 14.57% APY for running your own validator node. Since running a validator requires at least 1250 EGLD, plus some deeper technical knowledge, you proceed with delegating your coins to a staking pool. Staking EGLD can be done directly from Maiar, their official wallet.
After you’ve completed setting up your wallet and backing up your private keys, you then transfer your coins from Binance. Once the transfer is done, all you have to do to stake your coins is to go to “Earn” → “Stake”, select a delegate staking pool (Staking Agency has the best current rates) and you’re all set. You are now entitled to earn daily staking rewards for your coins until you chose to un-stake.
You can choose to redeem and sell the rewards you earn, or, even better, you can use compounding to your advantage. How? By re-delegating the earned interest at any time by using “Claim Rewards” then “Redelegate Rewards” buttons in Maiar wallet. Staking and compounding your initial 100 coins for one year gets you an extra ~13.6 EGLD in interest ($2130 based on current price). Leave the compounding work its magic for a few more years and you’ll see your investment grow exponentially.
Why I chose EGLD versus other staking coins in the previous example? Well, for a couple of reasons: it uses Secure Proof-of-Stake protocol, a more secure and improved version of PoS. It offers a good interest rate for staking compared to other similar cryptocurrencies. They also passed several security audits. Finally, Elrond mobile and desktop wallets are some of the easiest to navigate through.
Which coins can you stake
There are several cryptocurrencies that allow staking. Some are well established in the crypto space, while others are relatively new and kind of full of hype. These are some of the coins from the top 200 that I consider worthy for staking: ETH, ADA, SOL, DOT, ALGO, BNB, LUNA, ATOM, MATIC, EGLD, AAVE, ICX, ZIL, MINA, NEAR, BAND, QTUM, ONT, GRT
For a detailed list of audited coins with the best returns from staking, check out my previous post here.
If you don’t want your investments to be exposed to the huge volatility specific to crypto, you also have the option of staking stablecoins, such as USDT, USDC, DAI, BUSD, or PAX. These have the advantage, for now, of keeping the value of your investment pegged to the US dollar, while offering good APY rates. The main disadvantage is that, for most of these stablecoins, you can get staking returns of 8% or higher only from centralized platforms such as Swissborg, Celsius, or Nexo. You can still get some returns from stablecoins while using decentralized apps, but it will usually be between 2-5% per year.
Cryptocurrency staking options
There are various possibilities for staking your crypto, depending on each specific coin, on the type of wallet needed, on your level of blockchain know-how, or on the level of decentralization. After analyzing and actually using all of these staking options, I ranked them based on personal experience and preferences:
1. Cold staking
This is in my opinion the best way to hold and stake cryptocurrency. What does it mean? “Cold” is a term used to indicate that a cryptocurrency wallet is kept offline, on a physical device (as opposed to “hot” software wallets, that are accessible online). This characteristic makes staking more secure than any other staking option. Ledger Nano S is the most reputable cold storage wallet for storing and staking cryptocurrency. It takes some time to set it up and to transfer your assets, but once you’ve done this, you can rest assured that your coins are safe from scams and hacks.
Currently, there are only a handful of cryptocurrencies with full staking support on Ledger, including ATOM, ALGO, DOT, XTZ, and TRX. More cryptos will be supported in the future – the complete list can be checked here.
2. Staking using a software wallet
There are a wide variety of crypto wallets that include support for staking. Besides each specific coin’s official wallet, there are multi-coin wallets such as AtomicWallet, Guarda, Exodus, Keplr, MathWallet, Trust Wallet, Citadel.one, or My Ether Wallet.
Although not as secure as a Ledger hardware wallet, these crypto wallets can be used for generating passive income through staking. Just keep in mind to consider a few basic security tips, like storing your private keys offline, updating your wallet only from verified sources, or not opening shady emails or links.
Depending on each protocol, you can stake by either delegating your coins to a staking pool (like it is the case for ADA or ICX) or by direct staking (no delegation required, like ALGO, for example). Delegating your coins does not mean that they leave your wallet. It simply means that you are locking them in a staking pool contract, for an unlimited period, while you remain in control of the private keys.
3. Staking through a DeFi platform
This topic is a bit more complex and will be covered in-depth in a future article. The idea behind this is to lock an amount of crypto (usually split in two coins, like 50% ETH and 50% DAI) in a liquidity-providing contract on a DeFi platform. The APY is paid out in the form of the same or other coins/tokens. Examples of such DeFi platforms include Compound, Uniswap, or AAVE.
4. Staking as a validator
This option requires some more advance technical skills, as well as competitive hardware. Staking as a validator node also requires owning a larger amount of coins (minimum 32 ETH for staking Ethereum, for example). The yearly staking rewards are indeed higher than previous staking methods. However, with greater rewards also comes greater responsibility, as you’d have to install, configure, and maintain a main-net cryptocurrency client up to date and keep your validator node running 24/7.
5. Staking using a cryptocurrency exchange
If you don’t mind keeping your crypto on an exchange for longer terms, you might as well turn some profits from staking it. Most of the big crypto exchanges, such as Binance, Kraken, or Kucoin, offer the possibility of staking a large selection of coins for limited (15, 30, 60 days) or unlimited intervals. The interest rates are somewhat smaller than compared to previous staking methods.
6. Staking using a third-party staking provider
As mentioned, centralized staking platforms such as Celsius or Swissborg are only interesting because of their higher APY for stablecoins. Same as with staking via crypto exchanges, this option requires handing over control over your coins to a third party, which is why this option takes the last place in my list. It can be profitable, but I would recommend carefully reading their Terms and Conditions before transferring any crypto.
Risks and security
Staking crypto works as a financial incentive not to create fake or fraudulent transactions. Due to penalties for misleading or fake transactions, potential fraudsters or scammers will lose part or all of their staked coins and the right to validate future transactions. Since the stake is larger than the potential reward, a fraudster validator would stand to lose more coins than he would gain from a fraud scheme.
For one or more such bad actors to take control over an entire blockchain, they would have to own the majority of the circulating supply. Depending on the total market cap for a cryptocurrency, this scheme would be really impractical, as they would need to first own at least 51% of the supply. Of course, for smaller, newly launched projects, there is a higher risk of such an attack being successful. This is why is important to only stake cryptocurrencies with a high market cap and a large user base.
For securing your staked crypto assets, you will have to follow a few basic principles, like backing up and storing your private keys offline or using a Ledger hardware wallet if possible. Cryptocurrency investing, including staking, is not for everyone. It is very important to be aware of the risks circulating in crypto and also to know your risk tolerance before investing, even if it’s a smaller amount.
Crypto staking tools
https://www.stakingrewards.com/calculator – a very useful staking rewards calculator
https://compounddaily.org/calculator – simple compound interest calculator
https://defiprime.com/staking – a list of best staking pools
Uniswap – for exchanging Ethereum-based (ERC-20) tokens
PancakeSwap – for exchanging Binance Smart Chain tokens
QuickSwap – for exchanging Matic-based tokens
Swissborg – for staking USDC
Binance – for temporary staking some high-yield tokens
That’s it for now. Hope this info helps you in understanding how staking works, or at least hope it answers some of your questions.
If you want to further check out my how-to guide for doing your own research on cryptocurrency, you can find it here.
Cryptocurrency staking can be highly profitable in the long term, if done properly. It is still seen as a risky investment, as everything else cryptocurrency-related, but it can make a big difference in your early retirement portfolio.