Crypto staking is a way of using your tokens to help run a Proof of Stake (PoS) blockchain or a DeFi product, while at the same time, earning rewards (usually more of the staked tokens). It’s an easy way to passively earn more crypto.
Reminder on Blockchains and Consensus Mechanisms
A blockchain is a digital database or ledger of transactions that is maintained by multiple computers. Transactions are stored in blocks of information protected by cryptographic methods. They are validated by computers (“nodes”) and propagated to the network.
In order to validate those blocks and ensure global security, several mechanisms can be used, depending on the blockchain, among which 2 are particularly widespread: Proof of Work (PoW) and Proof of Stake (PoS) consensus mechanisms.
In order for PoW blockchains (e.g. Bitcoin) to work, new blocks must be “mined”, i.e. calculations have to be done.
The only people who benefit from this are those with the most computational power because the first to find the cryptographic solution for the validation earns the most. This, as well as verification by several nodes of the found solution, requires a huge amount of hardware and energy.
In PoS blockchains (e.g. Cardano), block confirmations are made by a limited number of “validators', who are selected at random in an unbiased way (algorithmically). Basically, the more tokens the validator provides, the higher the probability for him to be selected.
(see our blockchain guide and our article about PoS)
What is Crypto Staking?
Staking is locking a certain amount of tokens in exchange for rewards (a passive income) while simultaneously helping secure the blockchain.
This reward depends on the token and the duration of the lockup. The longer you stake, the higher the yield.
So, stake your coins and earn more back... simple?
Well, yes, but there are some caveats (depending on the cryptocurrency in question).
Some PoS blockchains require staked coins to be locked for a certain period of time, although sometimes they can be unstaked, it is not immediate. The value of your rewards earned (APY), lock-in period, and the amount needed to stake vary depending on the cryptocurrency.
For example, Cardano does not require coins to be locked, and regardless of the amount of ADA (the Cardano native token), they hold, can join a stake pool and earn some juicy rewards (usually around 4-5% APY).
SUMMARY. Staking your tokens earns you rewards and helps secure the network. Less equipment and less energy are required for a PoS blockchain, resulting in a more decentralized and more environmentally-friendly network.
How does Staking Help Secure the Blockchain?
Technically, validators are participants of the blockchain network whose function is to confirm transactions by validating blocks. Validators are selected at random and the probability of being selected rises with the amount of staked tokens.
Staked tokens are locked up as collateral. There is a mechanism that prevents malicious behavior. Validators acting inappropriately can be stripped of their staked tokens.
Thus, everyone's interest is to stake their assets and for validators (node operators) to act honestly.
What Cryptos can I Stake?
As we have already stated, crypto staking is only possible with PoS blockchains, although some centralized platforms have staking-like products for non-PoS blockchains. Remember though, custodial staking is risky!
Some of the more popular cryptocurrencies you can stake include:
- Cardano (ADA)
- Ethereum (ETH)
- Binance Coin (BNB)
- Avalanche (AVAX)
- Polkadot (DOT)
How do I Stake my Crypto?
I’m going to assume that by now that you’re not thinking of staking on a centralized exchange, so I’ll leave those out.
There are several ways to start staking cryptocurrency, depending on how much of a technical, financial, and research commitment you’re willing to make. For the sake of relevance, we will only focus on joining a stake pool in this article.
Becoming a validator/stake pool operator is much less common and requires a high level of technical prowess and more computing equipment than most people have.
Delegating your Tokens to “Staking Pools”
Joining a staking pool is by far the most common method, at least for regular people without millions invested!
Once you have your selected crypto tokens in your wallet, you need to choose a staking pool and connect your wallet to it.
Most PoS blockchains have specific instructions on their website but a simple Google search will reveal a plethora of instructional websites. Some websites, such as ADApools.org or poolpeek.com allow you to investigate all the available pools, you can even delegate to your chosen stake pool straight from the website.
Once you have staked your tokens, there is usually a warm-up time in which you don’t earn any rewards but once that is over you earn your rewards regularly. For Cardano the warm-up period is 15-20 days, then rewards are paid every 5 days (1 epoch).
Advantages and Risks of Crypto Staking
What are the advantages of staking?
- More environmentally friendly
- With less hardware required and therefore, less energy usage, PoS blockchains are much greener than PoW chains (e.g. Cardano is up to 100,000 times more energy efficient than Bitcoin).
- With less hardware required and therefore, less energy usage, PoS blockchains are much greener than PoW chains (e.g. Cardano is up to 100,000 times more energy efficient than Bitcoin).
- A simple way to earn a passive income
- Holders who employ a more long term strategy to their investments find that staking is a very straightforward method of making their investments work for them.
- Holders who employ a more long term strategy to their investments find that staking is a very straightforward method of making their investments work for them.
- Basic hardware requirements
- Staking doesn’t require anything more than an internet connection, a computer, and a crypto wallet. Depending on the minimum token obligation of the blockchain, anyone can do it.
- Staking doesn’t require anything more than an internet connection, a computer, and a crypto wallet. Depending on the minimum token obligation of the blockchain, anyone can do it.
What risks are involved with crypto staking?
- Crypto volatility
- The cryptocurrency market is very volatile; token values can drop considerably. Therefore, staking is better for those who aim to hold their investment for the medium to long term, reducing the effect of price swings.
- The cryptocurrency market is very volatile; token values can drop considerably. Therefore, staking is better for those who aim to hold their investment for the medium to long term, reducing the effect of price swings.
- Minimum lock-up period
- Some blockchains require you to lock up your tokens for a specified amount of time. This may result in users not having access to their investment should they need to. Lock-up periods vary greatly between blockchains. E.g. Ethereum (withdrawal currently unavailable at all), Polkadot (28 days minimum), and Cardano (no lock-up period).
- Some blockchains require you to lock up your tokens for a specified amount of time. This may result in users not having access to their investment should they need to. Lock-up periods vary greatly between blockchains. E.g. Ethereum (withdrawal currently unavailable at all), Polkadot (28 days minimum), and Cardano (no lock-up period).
- Custodial staking
- Many centralized exchanges and apps offer staking on their platforms, however, these custodial, i.e. you give up control of your tokens and are at the mercy of the platform. Always use a self-custody solution (holding your tokens in your own decentralized wallet).
- Many centralized exchanges and apps offer staking on their platforms, however, these custodial, i.e. you give up control of your tokens and are at the mercy of the platform. Always use a self-custody solution (holding your tokens in your own decentralized wallet).
- Not all blockchains are created equally
- There are many blockchains that offer staking, always do your research and choose one that stands the best chance of still being around when you want to unstake your tokens. Some have and will cease to exist.
Is Staking the Right Option for You?
There is no doubt that the staking mechanism is a great way to earn passive income but is it right for you? Ultimately it comes down to your investment strategy.
Questions you need to ask yourself include:
- Minimum staking amount
- Some blockchains require a minimum amount when staking (Ethereum; 32 ETH, Polkadot; 80 DOT (subject to constant change) and Cardano; no minimum (*excluding fees)).
- Some blockchains require a minimum amount when staking (Ethereum; 32 ETH, Polkadot; 80 DOT (subject to constant change) and Cardano; no minimum (*excluding fees)).
- Do you plan on swing/day trading?
- If you are more of a trader than an investor, the lock-up periods may not work in your favor.
- Will you need access to your crypto?
- Again, the lock-up periods of some crypto projects may inhibit your freedom to do what you need to with your crypto. Look for liquid staking options (no lock-up)
- Again, the lock-up periods of some crypto projects may inhibit your freedom to do what you need to with your crypto. Look for liquid staking options (no lock-up)
- How strongly do you believe in the project, long-term?
- Doing your research and understanding the goals and scope of the project is absolutely essential, confidence in the project is key. If it looks shady, steer clear!
- Doing your research and understanding the goals and scope of the project is absolutely essential, confidence in the project is key. If it looks shady, steer clear!
- How does staking compare to other passive income strategies available to you?
- As with any investment, you should always look into all options. Different passive income strategies include the more traditional bonds, real estate, and stocks or the groundbreaking decentralized finance (DeFi) options, such as lending platforms.
*Fees to stake ADA include
- 1 ADA. Transfer fee to move your ADA from a centralized exchange to your crypto wallet.
- 2 ADA. Registration for wallet delegation (refunded if you deregister your wallet).
- 0.2 ADA (approx) transaction fee.
Total of 3.2ADA.
Is Crypto Staking Profitable?
Yes, crypto staking can be profitable, provided that it fits into your investment strategy. Crypto staking won’t make you millions overnight but with staking rewards around 5-10% APY on average, it will definitely complement your investment (especially as many blockchains will auto-compound your interest).
You may see much higher staking rewards out there or maybe a centralized platform wants to attract more liquidity into its platform so it may offer a higher annual percentage yield (APY).
As already mentioned, keep custody of your tokens; “Not your keys, not your crypto” This is NOT possible on CEXs, and given the number of high-profile hacks we have seen on centralized platforms, it is more important than ever to be the one with the keys!
There is also the old adage to consider; “if it looks too good to be true, it probably is”. The recent crypto collapse of LUNA is a catastrophic example of this.
As always, do your own research thoroughly.
Final Thoughts
Crypto staking can be a fantastic way to earn a passive income, especially if you intend to hold your tokens for the long term. As the rewards auto-compound, this can lead to a surprising sum over the years.
As with all things crypto, do your own research, learn as much as possible, and seek financial advice if in doubt.