Cryptocurrency staking involves holding an amount of a particular coin or token within your wallet to earn the right to verify transactions and participate in the governance of the network.
Staking is a consensus mechanism implemented by blockchain networks that use Proof of Stake (PoS).
Staking is a less energy-intensive blockchain consensus mechanism. It requires minimal hardware compared to mining, but most importantly, networks utilizing it generally have faster transaction processing times than their PoW counterparts.
The only downside to staking is that the mechanism has not been thoroughly tested to prove its merits.
In comparison, Proof of Work (PoW), which Bitcoin and several other large networks use, has been around since 2009, a long enough time to iron out faults and make improvements.
Is crypto staking worth it?
Yes, cryptocurrency staking is worth it. However, the concept of staking is often misunderstood by most investors. If you are going to stake, you need to know why staking is important and why it is worth participating in.
Staking seeks to serve three purposes:
- Transaction verification
- Introduction of new coins/tokens into circulation
- Blockchain governance
Transaction verification
In any decentralized blockchain network, there needs to be a mechanism to verify transactions. In PoW networks such as Bitcoin, miners are tasked with this job. In PoS networks, stakers have the honors.
Since most blockchain networks aim to be decentralized, consensus mechanisms ensure that only legitimate transactions are included in the blockchain.
Whenever a user makes a transaction, validators will have to vote on the transaction’s legitimacy. Once a majority agrees to add it to the block, it will be included.
It is a way to prevent the double-spending problem, which is a situation in which a rogue individual makes more than one transaction using the same funds.
Transaction validators ensure that funds are only spent once.
Validation is one of the differences between staking and dividends.
Introduction of new coins into circulation
Just like miners in PoW networks are rewarded for their contributions to the networks, stakers are also rewarded for participating in staking networks.
The first way they are compensated for their efforts is through network fees paid by users.
The second one is through network rewards. These rewards are often given to block generators who ‘win’ the right to create blocks. Block generation is similar to the lottery.
The more coins a user has staked, the higher their chances of being selected to create the next block.
The reward for generating a block is brand new coins, and this activity helps introduce new coins into circulation.
Blockchain governance
Most staking networks have rules and policies that require only stakers to participate in the networks’ governance.
Activities such as network or code upgrades, reward quantities, validator incentives, and anything that affects the functioning of a network are some of the decisions taken by stakers.
This way, stakers can contribute to the improvement of a network through staking.
Can you lose money staking Crypto?
Yes, you can lose money staking crypto. Staking cryptocurrency is one way to invest in the developing economy and comes with several risks. There are ways to mitigate these risks, and you have to consider the risks before you stake your coins.
Let’s consider the risks inherent to your investing in staking coins.
Market risk
Market risk is perhaps the most important consideration you can make towards safeguarding your investment.
The value of cryptocurrency assets tends to fluctuate wildly within short periods. It is not uncommon to witness 50% daily drops and gains across multiple assets.
Staking networks typically offer returns to stakers at less than 15% APY. That is the yearly returns for staking your coins. Within the year, the value of your coins might likely fall or rise.
In the unfortunate incident that they fall more than the rate of return, you will have lost your money. Although, it is not a loss unless you sell.
To mitigate against this risk, you need to perform an objective fundamental analysis to choose the best networks to invest in with the potential to rise in value in the time you wish to stake.
This is one of the downsides of staking which doesn’t exist as much when airdropping. Read Staking Vs Airdrop.
Loss/Theft risk
The risk of losing your investment to a hacker is very prevalent across the cryptocurrency market. It is not exclusive to staking.
To stake in any network, you need to hold your assets in a wallet that is often connected to the internet, which risks your investment.
The best way to store your coins is to use cold storage methods such as hardware wallets that are not linked to the internet and cannot be accessed remotely.
Some ways to mitigate this risk are to stake your assets with networks that allow you to hold your assets offline using hardware wallets or use a staking provider with a strong track record for keeping investor assets secure.
Validator risk
A less common occurrence but still an event that poses a risk to your stake. This applies to stakeholders that run validators. Not all stakers get actively involved in validating transactions.
Those who do have to operate a validator node which requires a high level of technical know-how.
Nodes have to maintain 100% uptime; otherwise, they risk causing network problems. Some networks ‘punish’ offline validator nodes by slashing their stakes.
If you opt to operate a validator node, you must ensure that it is hosted with a highly reliable provider. Otherwise, you will lose your stake if the validator goes offline.
How much can you earn by staking Crypto?
How much you can earn by staking crypto depends on several factors. These include:
Staking amount – this is the amount of money you have held as part of your stake. This factor is important because the more you stake, the higher your rewards.
Staking works similar to a lottery system in which the more funds you have staked, the higher your chances of being picked to create the next block.
The blockchain network – different networks offer different rewards for their stakers. Some are more generous than others, but the more established or large-cap coins usually offer less rewards than their small-cap counterparts.
For example, Cardano (ADA) network, a well-established PoS network, offers rewards at about 7.25% APY.
On the other hand, Polkadot (DOT), a recently launched network, offers rewards at a more attractive rate of about 13.15% APY.
Staking strategy – there are a few different ways to stake your coins. You can be a passive staker holding your coins without participating in the governance; you can opt to run a validator node and directly participate in transaction validation and governing the network, or you can use the services of a staking provider.
Whichever strategy you choose will affect the returns you get. Running your validator node means that you will receive 100% of the rewards if you get to create a block.
Using a staking provider will attract service costs or commissions which vary amongst different providers and could be as high as 25-30%.
What are the risks of staking Crypto?
There are several risks involved in staking crypto. We touched on them briefly above, but let’s consider them in more detail.
Market risk
Cryptocurrencies are highly volatile assets. Staking for a profit can be risky, especially for networks with locking periods. These are holding agreements never to move your coins/tokens until the staking period expires. If this is the case, if the value of the coins falls during this lockup period, you could suffer losses.
Loss/Theft risk
If not stored correctly, cryptocurrencies are easy to lose either by theft or through misplacement of private keys to the wallets holding the coins.
Validator risk
This one applies to those interested in running validator nodes. Staking networks require that all participating nodes have 100% uptime. This is important because some networks perform routine activities dependent on the nodes, such as transaction validation, voting on validators, etc. Nodes can go offline for one of many reasons, including host failure. Node operators risk losing their stake if their node(s) go(es) offline.
Staking provider risk
For the less technically inclined, using a staking (or staking-as-a-service, SaaS) provider is the next best thing to running your node.
Staking providers operate similar to mining pools, and they collect investor funds to stake. Rewards are then split amongst stakeholders that pooled their assets.
The risk lies in choosing a rogue SaaS provider who may disappear with stakeholder funds or improperly run their nodes and suffer losses which are then passed on to their investors.
Read more at Is Staking Good for Crypto?
Liquidity risk
Liquidity is the ease of converting an asset into spendable cash. If you partake in staking a given coin, but you can’t sell your returns in the market, you may be stuck with undesirable assets.
What are the best cryptocurrencies to stake? And how to stake them?
There are three ways to stake any coin:
- Run a validator node
- Stake passively by holding your coins in a participating wallet
- Storing coins with a staking provider such as Binance, Coinbase or MyCointainer
Determining which coin is the best to stake is highly subjective, and you need to consider factors such as the returns, the fundamentals of the network, and your goals. To kick start you off, here’s a list of five of the most common coins being staked right now:
- Cardano (ADA)
- Rewards
- Delegates: 7.23% (APY)
- Pool operators: 7.46% (APY)
- Rewards
- Tezos (XTZ)
- Rewards
- Delegates: 5.48% (APY)
- Bakers (node operators): 6.1% (APY)
- Rewards
- Polkadot (DOT)
- Rewards
- Delegates – 13.14% (APY)
- Validators – 13.87% (APY)
- Rewards
- Ethereum (ETH2.0)
- Rewards
- 7.9% APY (reduces as network’s total staked value rises)
- Rewards
- Algorand (ALGO)
- Rewards
- 5.98% APY
- Rewards
Conclusion
Staking is a great way to earn returns while also contributing to the development of the new blockchain economy. If done right, it has the potential for impressive returns to the investor.
However, before staking, it is best to understand all the risks and benefits, and we hope this brief introductory guide got you started in your possibly profitable journey.
