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.
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)
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.
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.
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:
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.
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).
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:
*Fees to stake ADA include
Total of 3.2ADA.
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.
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.