Staking crypto is seen as an easy way to make returns on your digital asset investments without having to sell.
Lucrative tales of passive income are one of the many reasons people decide to invest in cryptocurrency. Indeed, this nascent technology has the power to transform all corners of the investment world as we know it today.
In this article, we look at how staking crypto works, what returns to expect, what pooling is, and, importantly, what the risks are.
Proof of Stake
Staking crypto is the practice of loaning your cryptocurrency to the corresponding blockchain to help maintain the network’s security. For this, you are rewarded in the native token on a compounding basis. With rewards ranging from 5 to 30%, it is easy to see why staking is one of the most popular attractions for crypto newcomers.
Most Proof of Stake (PoS) blockchains offer staking services that usually have a particular set of terms and conditions to follow in order to stake your crypto. However, you can also stake your crypto via a third-party provider such as an exchange like Binance or Kraken. They sometimes offer more flexible terms.
Whatever method you choose, the rewards of staking crypto can be attractive. However, remember the old adage: if something sounds too good to be true, it usually is.
Network Security
Without going into too much technical detail, a PoS network relies on the network nodes to confirm the status of transactions and ensure network security.
Staking crypto, as you might expect, is a core feature of a PoS blockchain. Unlike its counterpart, Proof of Work, it does not need expensive specialised mining hardware to operate. Instead, network validators are chosen based on the number of tokens they are staking, ensuring demand for the native token remains high.
Staking Crypto Rewards
Anyone looking staking crypto for themselves, often through a crypto wallet, is usually bound by particular terms and conditions. For example, anyone looking to help secure the Ethereum blockchain must hold 32 Ether before running a node on the Ethereum network.
Of course, how you decide to stake your coins is your prerogative. However, there is little difference between self-staking and using a third party. All you have to remember is, with both methods, you relinquish custody of your coins to the network. That means that if anything happens to the network, then you will find yourself out of pocket.
Rewards are calculated in various ways depending on which blockchain and service you choose. Common features across all stakers include how many coins the validator (node) is holding, how many coins the network is staking in total, and how long the node has been actively staking.
Because of the fluctuating nature of some of these factors, the rewards earned through staking crypto sometimes vary. It all depends on the service you choose. Be sure to read the small print.
Pooling
Anyone with sufficient technical and financial power may be interested in grouping resources and managing a staking pool. In this case, interested parties can group their resources to increase their chances of block validation and earn a greater share of the rewards. This is essentially the service that a third party offers where stakers are charged a fee for their chance of greater rewards. This is a great way to stake, usually via a platform such as Binance, without exposing yourself to the risks of self-custody.
A downside to doing it yourself can be the sometimes comprehensive terms and conditions you must abide by. DIY staking often involves a minimum staking amount alongside a minimum period, sometimes up to a year. By comparison, joining a third-party provider often gives the staker better terms, such as no minimum commitment and immediate unlock due to economies of scale and their ability to service your requirements.
As always, it is imperative that you do your own research, but I’ll acknowledge that third-party staking is often recommended for those new to crypto.
Staking Crypto Conclusion
Staking crypto isn’t that complicated and is one of the reasons why cryptocurrencies and distributed networks continue to rise in popularity. For minimal effort, anyone who decides to stake their tokens can earn as much as 14% APY (Polkadot) or 19% (Cosmos). However, the usual rate of returns is often in the 4-5% region, as seen with Ethereum.
Remember, any network or service offering staking rewards of 20% and above is suspect. If they are not fraudulent themselves, they are often tied to some form of scam or rug pull.
Staking your precious crypto doesn’t come without risks. Remember, by staking your coins, you effectively sign over the legal right to your assets without any recourse. Make sure you do your due diligence thoroughly beforehand to avoid any scammers.
It also pays to stake with the larger and more established blockchains, such as Ethereum, Polkadot, or Cosmos, as, again, you have no legal right to recall your tokens should the blockchain stop working or become compromised.
Staking is one of the biggest draws for the modern crypto investor. It is going a long way to break down the barriers to entry associated with this emerging technology. Whatever avenue you choose, always remember to conduct your due diligence and research what is involved before you decide to part with any of your own money.
