Investing, trading, and mining in crypto are some of the ways you can start earning with cryptocurrency. But none of these offers more lucrative rewards than staking crypto.
Investing requires a lot of patience to earn a meager profit on your principal amount. When you trade crypto, you need a lot of trading expertise to make sustainable profits, and this is why most people lose out on trading. Not everyone can make huge profits without expert signals or years of trading experience.
Lastly, as simple as it seems, not everyone can mine crypto too. Mining requires huge investments in high-end hardware and electricity and more often than not, the cost of mining exceeds its rewards. That leaves us with staking – arguably the best way to earn passive income with crypto, with relatively lower investment and higher returns.
Continue reading to learn all about what it is, how it works, how you can stake in a cryptocurrency, the best cryptos to stake in, and much more!
Table of Contents (click to expand)
Let’s start off with a simple analogy. You have $1000 with you, and you loan it to someone for a set period of time at a set interest rate. Once you’ve loaned the amount to the borrower, it gets locked. You can’t use it anymore.
Once the loan period ends, the borrower returns the amount to you plus the interest. You gain control of your asset along with the interest, which is the reward for lending, and you’re free to spend it any way you like.
It works in much the same way as standard interest-bearing loans work. The only significant difference is that while the latter offers you very low-interest rates, you can often earn at more than 10% with crypto.
The analogy I’ve just made is more than enough for you to understand staking on the surface: it’s simply holding a cryptocurrency to earn rewards. However, if you want a more in-depth understanding, and learn all the whats and whys of it, you have to understand an underlying phenomenon: the Proof of Stake mechanism.
You might wonder to yourself, why would you be rewarded just for holding a cryptocurrency and not doing anything. To know why you need to know how (Proof of Stake) PoS cryptos work.
There are two primary systems of validation virtually all cryptocurrencies are based on. The Proof of Work and Proof of Stake technologies. The world’s most popular cryptocurrency, Bitcoin, is based on PoW or Proof of Work. It determines how data is arranged into blocks in the Bitcoin blockchain. In other words, it’s a mechanism that lies at the very core of Bitcoin and adds security and authority to its blockchain.
Proof of Work involves mining. Miner computers race to solve complex mathematical problems which require super-fast processing speeds and loads of electricity. As a result, all the complex computation going on makes the Bitcoin blockchain more secure and adds to its authority.
Proof of Stake, on the other hand, offers an alternative path to maintaining a crypto’s decentralized consensus but with much fewer resources required. This is also why the crypto world is shifting towards PoS.
As compared to the PoW system that requires miners to solve math problems to add new blocks to the blockchain to make it more secure, PoS requires you to ‘stake’ or lock your holdings which are then used by the blockchain to validate transactions and add new blocks to the blockchain.
Once you’ve staked a given amount of crypto, it gets locked into the system for a set time period. The PoS protocol then randomly assigns stakes the right to add to the next block and validate other transactions. The term stake refers to the amount of crypto that’s been staked by a particular entity.
Although the protocol assigns rights randomly, the bigger your staked amount, the higher the chances of it being chosen. The rewards you earn from your stake depend on the way your crypto blockchain works. For instance, some cryptocurrencies reward stakers with the primary currency they use, and others may have a 2-token system.
Your rewards depend on the staking schedule too. The schedules can be entirely random and may vary between cryptos. Some blockchains reward users using a fixed percentage after a fixed period.
Here’s what the rewards usually depend on the following metrics, but this is not an exhaustive list.
- Coins value
- Stake period
- Total coins staked on network
- Inflation rate
How To Stake a Cryptocurrency
Before we move on, please note that not all cryptocurrencies use the PoS mechanism so not all cryptocurrencies can be staked. As mentioned above, Bitcoin uses the PoW mechanism and can only be mined. You can only stake cryptos that use PoS.
So first of all, you’ve got to choose the right cryptocurrency. Here are some examples of cryptos that use PoS and can be staked.
- Ethereum (2.0)
Choosing the right crypto is the first and most important part of cryptocurrency staking. The most common mistake people make is choosing a currency just because it offers bigger rewards than others.
Seeing cryptos offering a whopping 100% or even greater reward is not an uncommon sight. And although it’s very tempting to cash in such investments, it’s almost always a bad choice because such cryptos will definitely crash in the future.
Always buy crypto looking at the long-term. Go for it if it looks credible and profitable long-term investment. And yes, if staking is an option, look at it as an added benefit. It should not be your sole reason for investing.
Once you’ve made your choice, the very next thing is to buy that crypto. This phase is pretty simple, but you have to be careful which platform you use. The most straightforward option is to go for a crypto exchange that lets you stake crypto.
Note that not every platform that lets you buy crypto gives you an option to stake it. Not only that, some don’t even let you transfer it to another place so you can stake it. So the safest option is to buy crypto from exchanges like:
These exchanges run validators, which means they let you stake your holdings in-app with just a few touches.
If you want to stake your holdings on the same exchange as you bought it, you don’t have to do much. Just go to the staking page or option on your exchange and stake the amount. Some cryptos might have a minimum limit to the amount you can stake.
You can also go for a staking pool. A pool when many investors team up to make larger crypto funds so that staking together earns them more rewards than going individually.
To join a pool, you’ll have to transfer your holdings to a crypto wallet and then participate in a pool from there. That’s it. Once staked, there’s not much for you to do except count the passive income you’re making.
Pros and Cons
If you’re looking to invest in stakes as a source of passive income, you might want to weigh its pros and cons in order to make the best decision for yourself. It does seem like a very lucrative option, and compared to other forms of earning with crypto, it requires much less time, technical knowledge, and investment.
- Great source of passive income – You get much more lucrative returns with crypto stakes as compared to other sources of passive income.
- Easy to start – As compared to mining, you can start with much fewer resources. All you need is the investment amount and that’s it.
- Stakers get to participate – As a staker, you hold an important position in the cryptocurrency’s network. Although cryptos are still decentralized, you can have a greater say or vote in what happens next to the cryptocurrency.
- Market uncertainty – Crypto is volatile. Telling whether a particular cryptocurrency will rise or fall in value in the future is very difficult. That said, to stake means you’re taking on a risk. Once your crypto is staked, you can’t sell it in case its value begins to dwindle. In order to minimize this risk, invest in crypto that’s most likely to remain stable in value.
- Slashing – If you’re not going for one of the better-known exchanges, or if you’ve opted for other validator nodes offering higher returns, the blockchain may penalize you in case it detects the validator is not upholding 100% uptime and honesty in processing transactions. When slashed, a portion of your holdings is taken away.
- Fee – Everything comes at a cost. When you stake your crypto holdings, particularly through an exchange, you have to pay a fixed or variable stake fee.
Now that you have most of the information you need to start, allow me to nudge you in the right direction by recommending the top cryptocurrencies to stake. The following Altcoins are selected for being low-risk, and providing high returns.
- Ethereum (2.0) (ETH): Ethereum previously used a Proof of Work system and has now moved on to Proof of Stake. To stake Ethereum, there’s a minimum limit of 32 ETH. Once staked, you and your holdings will then “be responsible for storing data, processing transactions, and adding new blocks to the blockchain,” as mentioned on the Ethereum site.
- BitDAO (BIT): BitDAO is one of the world’s largest decentralized autonomous organizations (DAO) and holds the potential to be the next big exchange token. You’re offered an average annual return of 14.77% with a prize pool of 1,500,000 BIT.
- Tether (USDT): Tether is a stablecoin. This means investing in it does not involve a lot of risk-taking because the value of such Altcoins is known to remain stable. Although staking Tether is a relatively low-risk option, the returns offered are not too lucrative. Go for it if you want to earn at reasonable return rates like 3.5% keep risk at a minimum.
- Polkadot (DOT): Polkadot is one of the most attractive coins to stake in because it uses a scalable, multi-chain technology. The minimum stake amount is 40 DOT currently. Polkadot stakes give you an average yearly return of 14%. You can stake this coin at exchanges like Binance and Kraken. Moreover, DOT is among the best cryptos for the future as it’s also in the top 10 cryptos by market cap.
- Terra (LUNA): Last but not least, Terra presents an interesting opportunity in LUNA coins. The yearly staking rewards for LUNA are at an impressive 12.10%. You can stake in this coin from Binance directly.
|Only Proof of Work coins can be mined||Only Proof of Stake coins can be staked|
|Requires loads of energy and computational power||Requires much fewer resources. It can be done through an exchange.|
|The more computational power you have, the greater your chance of solving the block and getting rewards||The greater the number of coins you stake, the greater the chances of your stake being chosen to validate transactions.|
|Only practical for specialized parties that can source high-tech equipment and low-cost electricity||Practical for everyone with the basic know-how of crypto|
Yield Farming Vs. Staking
To the inexperienced eye, yield farming can look identically the same thing as staking. Both involve earning passive income by locking up your crypto holdings for a period of time. But there are very subtle differences.
Yield farming is a particularly new phenomenon as compared to staking. It involves investing your crypto in liquidity pools on DeFi platforms. When a yield farmer provides liquidity to a Decentralized Exchange (DEX), they earn a portion of the DEX platform’s fees, which are paid by users.
Yield farmers can contribute their coins for as long as they want. While stakers have to keep their coins staked for longer periods. For yield farming, farmers can hold them for as little as a few days or as much as many months. Farmers earn rewards daily.
This marks the end of this in-depth guide. If you’ve read the whole piece, you would surely have a pretty good idea of staking and how it works. Remember, choose the right coin and the right platform to stake, and you’re good to go!