How to Stake Crypto?

If you’re interested in discovering more about how to stake crypto to gain interest in your holdings, you’ve come to the right spot. Putting your unused cryptocurrency to work to earn interest is what staking is all about.

The two most common methods of acquiring cryptocurrency for investment purposes are mining and purchasing coins on a cryptocurrency exchange. Staking crypto is a popular option for crypto newbies who want to grow their cryptocurrency holdings without any special effort.

Crypto staking might be easier to understand if you compare it to putting money in a savings account. Because the bank puts the depositor’s money to work in various ways, the depositor is rewarded with interest on the investment. Therefore, staking coins is analogous to earning interest on your cryptocurrency.

With the high-interest rates offered by some cryptocurrencies for staking, staking might be an excellent way to use your cryptocurrency to earn passive income. Knowing the ins and outs of how to stake crypto is essential before you get started.

Everything you need to know, from the fundamentals of staking to the various sites where investors can stake crypto, is covered in this article. Read on.

What Is Crypto Staking?

Blockchain technology is the foundation of cryptocurrencies; it is used to verify and record all crypto transactions. Validating these transactions on a blockchain can sometimes be referred to as staking.

Staking, or leaving one’s crypto assets in one’s crypto wallet, allows the network to utilize those assets to create new blocks on the blockchain in return for a financial reward.

To be more specific, the term staking refers to the practice of locking, i.e., loaning your cryptocurrency to the crypto trading platform to assist in maintaining the blockchain network and verifying the transactions.

These verification procedures are governed by the Proof-of-Stake (PoS) or Proof-of-Work (PoW) protocol, respectively, depending on the cryptocurrency type and the underpinning technology of the platform.

The Consensus Protocols

Proof-of-Stake (PoS) and Proof-of-Work (PoW) are both consensus protocols. Both of these mechanisms are important to a blockchain’s capability to validate its transactional history and function without compromising its authenticity. On a broader level, the protocols help achieve consensus within cryptographic networks.

The Proof-of-Stake protocol uses significantly less power than the standard Proof-of-Work protocol, which demands specialized mining hardware to solve complex mathematical puzzles using the device’s processing power and more electrical power.

Consensus, however, can only be reached with active participation by crypto investors. Staking is the practice of actively engaging in the consensus-taking processes of a blockchain network by locking up a portion of an investor’s cryptocurrency assets on the trading platform.

In this way, stakers become responsible for authorizing and confirming all of the transactions that take place on the blockchain. In return, those investors who stake their coins to support the blockchain network receive compensation for their participation.

The Mechanism Behind Crypto Staking

Blockchain networks also use consensus mechanisms to solve the double-spending problem associated with digital currencies. For a cryptocurrency to be valuable, its users must be able to make a single use of each coin. Without such a security, crypto traders could repeatedly execute the same transaction, rendering the cryptocurrency worthless.

With no centralized controlling power, such as governments or central banks, finding a solution to this issue was extremely challenging. By employing the PoW protocol, the Bitcoin network was the first digital currency to successfully circumvent this issue. However, PoS is deemed to be a more viable alternative to the PoW.

To begin with, in the PoS protocol, there are network validators instead of miners, who stake cryptocurrency on the network, i.e., they lock up a fixed quantity of coins for a predetermined amount of time, rendering them inaccessible for their personal use.

Validators who do this open themselves up to the possibility of being randomly selected to identify the next block that needs to be verified on the network.

The next step is for more validators to confirm that they also consider the block authentic. Following confirmation from a sufficient number of validators, the block will be added to the distributed ledger, and all validators participating in the procedure will receive new coins.

The protocol penalizes validators that propose blocks or go offline by reducing their staked cryptocurrency.

Validators vs Delegation

On a technical level, there are two primary ways to participate in crypto staking. The first option is to act as a validator by backing this process. Hosting a staking node requires advanced technical knowledge and always-online infrastructure. Some blockchains provide incentives to their validators through higher payouts and more voting/control rights.

Becoming a validator, though, is more difficult than it sounds. Simply being in the running for the job requires a considerable time and money commitment from you. On the Ethereum 2.0 network, for example, validators are required to make an investment of 32 ETH, which is equivalent to approximately $150,000.

For less well-off crypto investors wishing to participate in the staking process, delegation is a typical solution. Delegation is the act of lending your assets to a public validator node that would use them in the Proof-of-Stake validation process.

This way, you can contribute to safeguarding the network by delegating your assets to a trustworthy validator on a protocol such as Polkadot or Tezos. As a delegator, you have no obligation to host the node. Instead, you pay a small charge in exchange for a cut of the profits from staking.

How to Stake Crypto?

You can engage in staking crypto via cryptocurrency exchange, staking pool, or hardware wallet.

Staking Crypto on a Cryptocurrency Exchange

The easiest way to start earning interest on your staked cryptos is through a crypto exchange. The process is relatively simple and straightforward. Start by checking the exchange’s staking rates, its safety, payment methods, withdrawal procedure, and customer service.

Since not all cryptocurrencies may be used to generate interest, the next step is to choose your Proof-of-Stake cryptocurrency, as not all coins can be staked. Don’t just add cryptocurrencies to your portfolio because everyone else is doing it; add them because you genuinely believe they’re a good long-term investment.

As the last step, stake your desired quantity of cryptocurrency by using the Staking Tool provided by your exchange. Now that you’ve committed to the new crypto venture, you may relax and watch your funds accumulate.

You need to be aware that the policies, services, and charges associated with each of these trading platforms will be different from one another. It is a good idea to perform some preliminary research before committing to a single platform to ensure that it is a good fit for your trading needs.

Staking Cryptocurrencies on a Cold Storage Device

It doesn’t require specialized expertise or abilities to stake cryptocurrency on a hardware wallet like Trezor or Ledger. To earn interest on your currencies after securing them with a hardware wallet, you’ll need to install the corresponding staking software for those coins.

After that, you’ll need to open a wallet and deposit the coins you intend to stake. You wouldn’t say it was complicated, would you?

Staking Cryptocurrencies Through a Staking Pool

Staking pools allow cryptocurrency investors to pool their resources to increase their potential for staking profits. Just like with the crypto exchanges, there are a few things you should consider before joining a staking pool.

Reliability. In case the servers for your staking pool go down, your rewards will stop as well. Choose one that comes as close to 100% uptime as possible.
Fees. Most staking pools will only deduct a nominal fee from your staked earnings, so it’s still a win-win. Reasonable sums are currency-specific but often range from 2% to 5%.
Size. Smaller pools have a lower chance of being selected to validate blocks, but they can provide greater payouts per validator because they don’t have to split their earnings to many investors.

On the other hand, some cryptocurrencies place a cap on the total number of rewards that may be earned by a pool, which means that the most successful pools risk becoming overly competitive. Generally speaking, most investors do well with medium-sized pools.

Most Popular PoS Coins Used for Staking

How much return you get on your locked-in cryptocurrencies depends on the cryptocurrency you bought. In most cases, the most you can expect to earn by staking your cryptocurrency is a reward percentage (RPY) of between 4% and 8% yearly.

To this end, not every coin with a high market cap is good for staking. For example, the return on investment (RPY) for some lesser-known coins, such as Kava (KAVA), is significantly higher than that of the most prominent cryptocurrencies on the market, which typically offer RPYs ranging from 4% to 10%.

The following is a list of some of the most popular cryptocurrencies for staking, in no particular order:

Ethereum 2.0 Token (ETH2)

In October 2021, following years of anticipation, Ethereum’s long-awaited upgrade to PoS was finally initiated with the Altair hard fork. The financial markets are largely anticipating that the Merge would assist the blockchain in overtaking Bitcoin as the most valuable cryptocurrency by the years 2023 and 2024.

Binance Token (BNB)

The cryptocurrency trading platform Binance is the largest of its kind in the world. In 2017, the platform introduced its own token. On the list of the major cryptocurrencies, the Binance token currently ranks among the top five alternative cryptocurrencies, according to CoinMarketCap.

With an annual percentage yield (APY) of 12.7% on delegate pools, BNB is an excellent option for staking. The lowest stake required is just 1 BNB. On the other hand, you’ll need an astounding 665,000 BNB tokens to operate a validator node. There is a 7-day lockout on both plans.

Tezos (XTZ)

Tezos (XTZ), which debuted in 2014, is a smart contract-compatible, programmable cryptocurrency. There’s a self-correcting feature built into the token to avoid hard forks (i.e. blockchain splits).

To participate as a qualified validator on the Tezos blockchain, you must first invest at least 8000 XTZ and hold them locked for 14 days. On the other hand, if you don’t have that many tokens lying around, you can still earn an APY of roughly 5.5% by taking part in the delegator pools.

Cardano (ADA)

2015 saw the debut of the Cardano (ADA) Proof-of-Stake blockchain, which features smart contracts and enhanced scalability.

Staking on ADA has a number of attractive advantages, including the absence of a mandated minimum limit as well as no lock-in time. If you join one of the many large and well-known delegated pools, you can immediately earn your incentives with minimal effort. Regarding Cardano, the average annual percentage yield for staking is around 6%.

Polkadot (DOT)

Polkadot (DOT) can circumvent the high transaction fees and network congestion that plague other blockchains like Ethereum by employing a sophisticated architecture that consists of many chains. Despite having a 2020 launch date, the blockchain has already risen to the eleventh spot on CoinMarketCap’s list of the most popular cryptocurrencies.

Solana (SOL)

At its inception, decentralized financial transactions were a key focus of the Solana blockchain. The initial public offering of SOL tokens occurred in 2020, with a price of $0.220 per token.

On the Solana blockchain, validator nodes can run without minimum resource requirements. Both validators and delegate pools are subject to a lock-up period of five days. Around 6.97% annual percentage yield (APY) can be earned through pooled incentives.

Pros and Cons of Staking Crypto

There are benefits and drawbacks to staking cryptocurrency, just as there are to investing in any other form of a volatile financial asset. The specifics are outlined below.

Pros

You can earn much money, as the interest rates are relatively high. All you need is a PoS cryptosystem.
PoS networks consume significantly less power than PoW ones.
Staking is way easier than mining. Almost everyone can stake some cryptocurrency through a trading platform and make a profit. Mining, on the other hand, is a process that calls for specific (and rather expensive) hardware.

Cons

Losses from a large drop in the value of your staked assets could easily cancel out any gains from interest.
In comparison to PoW, PoS is a more recent innovation, so its security features remain yet to be tested. PoW networks are protected by a shield of encrypted energy produced by a high hash rate, but it is unclear how PoS networks are safeguarded. Theoretically, a powerful cyber-criminal might quickly seize control of a PoS network if they had access to sufficient resources.
On a PoS network, the investors with the largest number of tokens at stake have the most influence.
PoS coins are pre-mined, which means that the entire quantity is generated all at once by a select group of individuals. Users must have trust that either the original creators of the cryptocurrency didn’t hoard too many for themselves or that a malicious actor won’t amass enough cryptocurrency to seize control of the network.
Being a validator can be more expensive than becoming a miner, which can lead to a more centralized PoS ecosystem.
To use the staking method, you need to keep your coins locked up for a predetermined period of time, during which you won’t be able to sell or otherwise dispose of the staked assets.

Conclusion

Staking can be a way to passively earn cryptocurrency if you have PoS crypto assets that are otherwise sitting idle. It’s similar to the interest you’d get from a savings account, but the rewards could be greater if you were willing to take on greater financial risk.

It may seem like a stretch to learn about cryptocurrency staking in addition to buying Bitcoin or navigating a cryptocurrency exchange, but doing so can really make you a more well-rounded trader.