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Crypto Staking: What You Need to Know
Generate passive income with crypto staking
Staking is an innovative method for earning passive income with crypto by providing assets for network security. Far from the traditional approach of mining, staking offers crypto enthusiasts an alternative means to participate in network validation while earning rewards. Whether you're a seasoned investor or a newcomer to the crypto sphere, understanding the ins and outs of staking provides massive opportunities to increase your crypto returns.
What is crypto staking?
Cryptocurrency staking is a process by which you can participate in the validation and maintenance of a blockchain network by holding and "staking" your coins or tokens. You’ve heard of having “skin in the game,” which means having shared risk in something with the expectation of returns. In this case, a crypto investor stakes tokens like AVAX, for example, on its native blockchain Avalanche to help produce new blocks and secure the network. Stakers get AVAX tokens as a reward for supporting the network - but as with all things, there’s risk. The staked assets could be “slashed” or penalized when a validator does not follow the rules of the protocol either intentionally or negligently.
Proof-of-stake vs. proof-of-work
Unlike the traditional proof-of-work (PoW) consensus mechanism used by Bitcoin, for example, which relies on miners solving complex mathematical puzzles to validate transactions and secure the network, many blockchain networks now use a proof-of-stake (PoS) or a variation of it. In a PoS system, validators are chosen by the protocol to create new blocks and validate transactions based on the number of coins or tokens they hold and are willing to "stake" as collateral. Validators are people or entities who run nodes on computers that rely on transactions, keep a full copy of the blockchain ledger and produce blocks from time to time. Staking rewards serve as an incentive to hold and support the network, fostering decentralization and security.
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Staking your cryptocurrency can be a rewarding way to actively participate in blockchain networks while earning passive income. Understanding how to stake your crypto effectively while understanding the risks is key to maximizing your earning potential.
Here’s how to get started staking crypto:
1. Choose the right cryptocurrency.
You must buy or already own a stakeable crypto in order to stake it. How to stake your crypto starts with visiting a staking data aggregator site like Staking Rewards. This site allows you to explore staking assets including staking rewards and other valuable data.
Before diving into staking, research and select a cryptocurrency that supports staking and aligns with your investment goals. Popular staking coins include Ethereum 2.0 (ETH), Cardano (ADA), Polkadot (DOT), and Solana (SOL), among many others.
Key Takeaway
Crypto investors should have conviction about a native blockchain asset like ETH, for example, before considering any staking rewards. The rewards may factor into investment decision-making, but they are more of a bonus rather than a main reason to invest. First, invest in crypto because you believe in the long-term potential. Second, stake the assets to support the network and get the staking rewards.Â
2. Select a staking platform.
Once you have a stakeable cryptocurrency, choose how you want to stake and find a reputable staking platform or wallet that supports staking for the specific coin. Staking service providers typically support multiple chains and their respective native assets. The more assets you stake the more likely you will need additional wallets to manage a multi-crypto asset portfolio.
Two examples of staking service providers:
Validator nodes are required to stake on a PoS networks and since this is technical in nature, the alternative that most people use is delegating staked assets to a validator service like the ones mentioned above.
3. Understand the staking requirements.
Different cryptocurrencies have varying staking requirements, including minimum staking amounts, lock-up or unbonding periods, and technical specifications. Familiarize yourself with these requirements to make informed decisions when staking your assets.
PITFALL
Remember: Risk is the name of the game, and a 28-day unbonding period for JUNO, for example, a Cosmos IBC chain, can be a long time if the price collapses on an asset. Even if you wanted to stop your losses, you’d have to watch the freefall from the sideline until your unbonding period ends.
4. Diversify your staking position.
If you choose to delegate to a validator then delegate to more than one outside the top 10 validators. Multiple validators support a more decentralized network. If all the token delegations are concentrated in the top three validators, then the network is more akin to a centralized model. Blockchains are more reliable and trustworthy when power and control is distributed. Otherwise, what’s the point? We might as well go back to legacy banking.
EXAMPLE
Alice has 1,250 ATOMs tokens, the native asset of the Cosmos blockchain. She stakes 250 ATOMs to 5 validators outside the top 20 validators. She is supporting decentralization while simultaneously diversifying the risk of being concentrated with a single validator. If Alice wants to sell some ATOMs, she can unbond 250 ATOMs from one validator instead of having to unbond her entire stash.
Keplr wallet provides a validator and staking dashboard (see screenshot below) Coinbase is the top validator with 8.25% of voting power and ATOMs staked. You can also see the commission charged by validators. Coinbase also has the highest commission by far of any validator in the list.
If you select a top 10 validator on the Keplr dashboard, you get a warning:
“You are staking to one of the top 10 validators.”
Furthermore, it says, “To improve decentralization, please consider staking to other validators.
5. Stay informed.
Keep abreast of the latest developments, updates, and news related to your staked cryptocurrencies and staking platforms. Join community forums, follow reputable crypto news sources, and engage with fellow stakers to stay informed and make educated decisions.
6. Monitor performance and rewards.
Regularly monitor the performance of your staked assets, including staking rewards, and validator performance. Most staking rewards need to be claimed and potentially restaked for compounding returns.
PITFALL
Some validators get slashed and jailed for performance violations. They may also go offline for other reasons. If your tokens are delegated to an inactive validator, you don’t earn any staking rewards. Regular monitoring avoids this situation.
7. Long-term strategy
Staking is more conducive to a long-term strategy essentially because of lock up periods and staking management. Day trading and short-term strategies, for example, are the opposite of a long-term play. If you have a long-term focus, then staking is a must in your investment toolbox. By reinvesting your staking rewards back into the staking pool, you can accelerate your earnings and maximize your overall returns.Â
By following these tips and guidelines, you know how to stake your crypto assets and unlock the potential for passive income while actively contributing to the growth and security of blockchain networks. Remember to conduct thorough research and stay informed to make informed decisions and maximize your staking rewards.
Why not all cryptocurrencies have staking
Not all cryptocurrencies have staking mechanisms for several reasons:
Consensus mechanism
As previously mentioned, staking typically relies on Proof of Stake or a variation of it, where validators are chosen based on the number of coins they hold and are willing to lock up as collateral. Bitcoin uses the Proof of Work consensus mechanism, where miners solve complex mathematical puzzles to validate transactions and secure the network. Cryptocurrencies using PoW do not have staking because they rely on mining for network consensus.
Key Takeaway
Miners earn block rewards in PoW for supplying computing power and validators earn staking rewards in PoS for supplying assets. Both mechanisms reward their respective participants for providing network security.
Staking is a data integrity mechanism
Staking and staking rewards are not directly part of an investment scenario. Understanding why to stake crypto is more important than how to stake crypto.
“Rewards and fees are compensation for services rendered, whether they are received directly or through a service provider’s platform that the staker relies on for technical support. Rewards and fees are not yield on a loan, nor are they a dividend on investment. Staking is a data integrity mechanism that Ethereum and similar blockchain networks require to function, not an investment scheme. Service agreements that offer technical staking solutions are not investment contracts or any other type of enumerated security.”
Key Takeaway
Staking may be taxed as ordinary income or be similarly taxed as portfolio income like dividends or interest depending on the jurisdiction of the taxpayer, but it’s compensation for a service and not an investment scheme. Stakeable assets are an investment regardless of whether the holder chooses to stake those assets or not.
Related: How to Navigate Taxes on Cryptocurrencies
Make money with crypto staking
Staking cryptocurrencies can be a lucrative way to earn passive income while actively participating in blockchain networks. These rewards are typically distributed in the form of additional coins or tokens of the staked cryptocurrency. The amount of rewards you earn depends on factors such as the amount of cryptocurrency you stake, the duration of staking, and the network's staking rewards percentage. There are a number of ways to make money with crypto staking.
Here are four ways to stake, from easy to more technical:
Delegated stake
- Stake digital assets on an exchange (only recommended to get in the game).
- Stake directly using your Web3 wallet (self-custody wallet) to a validator or your choice.
Key Takeaway
Delegating stake means you delegate your crypto to a validator who does all the technical work on your behalf for a fee.
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Validator stake
- Staking-as-a-service is a hybrid because you are not deploying your own equipment and technical expertise.
- Become a validator and stake your own coins (more technical most people don’t do this).Â
Overall, crypto staking offers a viable opportunity to make money by leveraging your cryptocurrency holdings to earn staking rewards and contribute to the growth and security of blockchain networks. Always keep in mind, you must do your own due diligence. Be sure to conduct thorough research, understand the risks involved, and choose reputable staking platforms or wallets to maximize your earning potential and ensure a secure staking experience.
How to get started with crypto staking
Let’s continue with the above examples.Â
Alice has ATOMs in her Keplr Web3 wallet installed as a Chrome browser plugin. She clicks Manage Portfolio in Keplr Dashboard in her Keplr wallet to get the Keplr staking dashboard (see screenshot below).
She currently has 1,125 ATOMs staked across 6 validators. She also has 4.2 ATOMs in her wallet (unstaked assets) and 10.8 ATOMs ready to claim.
Alice chooses to claim her 10.8 ATOMs by clicking the claim button. Then she proceeds to stake those rewards with StakeWithUs, one of her existing validators. She clicks the stake button and confirms the transaction in her wallet (see screenshot below) Alice can also choose to switch validators or unstake her ATOMs from the same screen. Now you’ve seen staking in action.
How to stake crypto upsides and downsides
There’s a whole world to staking with so much more to cover, but now you get a taste of it. Staking provides rewards in a way that’s unique from an investment perspective. We already discussed how staking rewards are not investment income but the staked asset is an investment. Alice stakes ATOMs and gets ATOM staking rewards in return, for example.
EXAMPLE
Alice initially staked 1,000 ATOMs when ATOM was $8 per token. Her rewards immediately thereafter would be close to the same $8 per token. Two months later ATOM drops to $6 per token so her staked assets (the principal) just when down by 25% and the value of here rewards also drop by 25%. Conversely if the value of ATOM went up to $12, then the principal asset increased by 50% and the value of the staking rewards also increases by 50%.
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Key Takeaway
There is no traditional investment that dances in tandem like staked assets to staking rewards where the principle and the return go up and down by the same amount simultaneously. Live by the sword and die by the sword. Staking works very well for long-term bullish investors.
Can I lose staked crypto assets?
Should I focus on the highest staking reward rate?
Should I only invest in crypto assets that have staking rewards?
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