The sporadic price movements and volatility of trading crypto assets have rendered crypto staking a haven for investors. Crypto staking concept lies in a low-risk investment set to yield rewards. For this reason, investors are flocking in multitudes on the lookout for the next big crypto asset to stake on. In this article, we will be diving into all you need to know about crypto staking.
What is crypto staking?
Crypto staking refers to locking up cryptocurrency and receiving rewards after a particular period. Crypto staking gives a win-win situation for the blockchain and investors. When investors stake their coins, the security of the blockchain is ensured. Staking holders thereby possess the power to vote and make decisions on the blockchain. In essence, your staking rewards are given by interest of the original amount you staked. Staking rewards depend on the number of coins you stake, the cryptocurrency, and how long your coins have been locked up.
How does crypto staking work?
Crypto staking runs on the consensus mechanism known as Proof of Stake (PoS). Proof of Stake is a protocol that entails that coins are locked up for a blockchain’s security. This is opposed to the Proof of Work (PoW) consensus mechanism, which requires more intense energy and crypto miners to validate transactions on the blockchain. Crypto staking can only be performed with coins that use the Proof of Stake consensus mechanism. This is because the PoS is the only protocol that allows staking by virtue of its mechanism.
The first step involved in staking is that validators invest a certain amount of money. It should be noted that the higher the amount of money staked, the higher the rewards. This is because interest will be based on the number of coins staked. Keep in mind that the whole point of staking on the blockchain’s side is to validate transactions. This begs the question: How exactly does locking up coins help the blockchain? When you stake your coins, you officially become a validator. However, validators are chosen at random by the protocol. A series of transactions are performed on the blockchain every second, waiting to be validated. Staked coins are used to validate those transactions. Your coins could be chosen at any time by the protocol and used on the blockchain. In return, you get cryptocurrency as a reward when they are freshly minted. Other validators get rewarded too, according to the number of coins they staked. Recall that as new blocks are put in the blockchain, fresh coins are produced. Part of these coins will then be distributed to various validators.
Staking is not permanent and you hold power to unlock coins any time you want. However, there are exceptions with some cryptocurrencies. For certain cryptocurrencies, you have to wait till a certain period before you can unlock your staked coins.
Staking pools consist of a group of crypto holders that join their coins, stake the combined coins, and get rewards as a whole which are distributed to each validator. Staking pools are convenient if you do not have the minimum amount of coins to stake cryptocurrency. Suppose you want to stake BNB and you do not have the minimum amount of 1000 BNB available. Instead, you have 5000BNB. You can easily join a staking pool since the contributors of other validators could even exceed the minimum amount. Staking pools also give validators chances of getting higher rewards since costs from fees that would have been paid individually are eliminated.
Which crypto is best for staking?
Here are the best cryptocurrencies for staking:
- Ethereum 2.0 (ETH): Since Ethereum is one of the leading cryptocurrencies in the market, it is no surprise that it holds high staking rewards. To stake Ethereum, a minimum of 32 ETH must first be deposited. The improved cryptocurrency has an annual average return of about 10%. Ethereum is perfect if you are investing long-term, especially with the launch of its upgraded version Ethereum 2.0 and the potential it brings.
- Polygon (MATIC): Polygon was introduced to increase scalability and convenience for users on the blockchain. To stake on Polygon, you will need to transfer MATIC to your Polygon wallet. Polygon has a maximum APY of around 14%.
- Cardano (ADA): Cardano is known to be an energy-efficient and eco-friendly cryptocurrency. A great feature of staking Cardano is that no minimum amount is required. Validators can receive an average annual return of about 5% using Cardano.
- Binance (BNB): Binance is no stranger in the crypto world as it holds the position of the top crypto exchange platform. The platform launched the coin BNB, which has thrived well in the market. BNB requires validators to stake a minimum of 10,000 BNB. Staking BNB can offer up to a 13% annual return.
- Tether (USDT): Tether is a leading stablecoin aimed at easy transfer of funds from the crypto market to banks. Tether is a preferable coin to stake due to its high trading volume and activity in the market. Staking Tether has an average annual return of about 5%.
Is crypto staking profitable?
The short answer is yes. Crypto staking has been profitable for many investors yielding returns with low risks. Bear in mind that the returns of staking depend on the performance of a coin. Staking rewards are in direct correlation with a coin’s trends and its behavior in the market. If people are flocking towards a coin and active trading is occurring, then the staking rewards are a lot more profitable on the side of the validators. This is because more staked coins would be required to validate additional transactions leading to better compensation to validators.
By this explanation, you can understand that different coins have different staking rewards. For example, staking Tether yields an average annual return of about 5%, while staking Cardano yields an average annual return of about 5%.
So we can say that crypto staking is indeed profitable. However, you might notice significantly lower interest rates compared to conventional investments. This can be attributed to the low risks required in staking. Remember that the general rule of thumb in investments that entails high risks bring high rewards and low risks bring low rewards.
Benefits of crypto staking
- Passive income: The most obvious benefit of staking crypto is passive income. In essence, staking does not require lots of work, yet it generates returns for validators.
- Blockchain maintenance: Staking makes it possible for blockchains with the Proof of Stake (PoS) consensus mechanism to be efficient. It helps to ensure the security and validity of transactions.
- Energy efficient: Compared to its counterpart, Proof of Work (PoW), staking is a lot more energy efficient. It does not involve the powerful computational effort required in PoW that leads to the release of harmful gas emissions.
What are the downsides of staking?
At first glance, crypto staking looks rosy and the best option for low-risk investors. However, we can still acknowledge its negative sides. Here are the risks of crypto staking:
- Lockup periods: Some crypto assets mandate validators to undergo lock-up periods with their assets. Lock-up periods refer to a timeframe when investors have to wait before they can access their investment. In this case, validators have to wait for some time after locking their funds before they can unlock them. Staking such assets can be a minus if there is a need for the asset in the near future.
- Market volatility: Although staking serves as a low-risk investment and protects against volatility to an extent, it is still influenced by price movements in the market. If the value of a coin is constantly plummeting, the staking rewards of such a coin will be significantly low as well.
- Staking fees: As improbable as it sounds, validators are required to pay staking fees. Such fees may eat out of your staking rewards as they are usually a percentage of your returns.
- Security risks: If proper measures are not taken, the security of your network can be compromised, leading to the theft of your staked tokens. Hence, it is important to ensure the efficiency of protocols before staking.
- Slashing: Slashing is a consequence of misconduct on a network that involves your returns getting cut down. It helps to mitigate the ill behaviors of validators on the network. However, you might not have a bad intention but still fall victim to slashing. For example, a validator could have their returns slashed if their nodes accidentally misbehave and the network detects it.
Crypto staking is one of the many ways to earn from the nascent technology which is cryptocurrency. It is a great fit for investors trying to play it safe and invest in the long run. However, you must still acknowledge its risks and ensure that you are well informed on the coin and network before staking. Ensure that you follow the rules of staking adequately, so you don’t fall victim to losses or slashing.
Ebiere Watchman is a prolific writer specialized in web 3.0 and finance. Ebiere’s experience includes research projects, sales copywriting, and storytelling. She prides herself in crafting impeccable content to drive mass adoption in cryptocurrency.