With crypto staking, you earn funds by holding coins or tokens in your wallet. On Proof of Stake blockchains, rewards based on minting new coins are distributed to those who stake funds according to the size of their holdings.
You can also combine your holdings with the funds of other investors in a staking pool. When the pool earns payments, you receive a portion in proportion to the size of your contribution to the pool.
Your money never leaves your wallet and it is never put at risk, which makes staking crypto a very safe investment. However, you may not remove your funds during the staking period. Staking periods range from a day to a month or more.
You can find staking options at cryptocurrency exchange sites. Some crypto wallets also have features for staking.
The amount you earn varies according to market conditions and which currency you are staking. Investors generally report the equivalent of annual percentage yields of 7% to 25%, which is comparable to what investors hope to earn in the stock market – without putting their holdings at risk. This makes staking a desirable source of passive income. It’s no wonder so many investors are asking what staking crypto is all about.
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What Is Staking Crypto and How Does It Work?
Staking should not be confused with lending, though it is similar. Decentralized crypto exchanges rely on automated market maker systems that let you lend funds temporarily to liquidity pools within the AMM. Some refer to locking the funds temporarily in the liquidity pool as staking, but technically this is lending. The result is the same, however: You earn interest for funds you pledge not to withdraw for a certain period.
What Is Proof-of-Stake (PoS)?
Proof-of-Stake (PoS) is a consensus mechanism that is used by a cryptocurrency blockchain network to process and validate transactions. This requires network participants to stake (or lock in) a large amount of crypto to be able to participate in the network.
This staked crypto acts as collateral, proving that the node operator has “skin in the game” and will lose their crypto if they do not uphold their agreement to the network. This also secures the network, as there is less incentive to act maliciously as a validator on the network if doing so causes the price of the crypto to crater, resulting in massive losses for the staked funds.
All of this leads to a more efficient network operation than proof-of-work (PoW) blockchains, and helps create a secure environment for operating blockchain applications and transactions.
PoS node operators are eligible for block rewards, but eligibility is randomized, with greater odds being given to users who stake the most amount of crypto.
Some examples of popular PoS cryptocurrencies are Ethereum 2.0 (ETH), Tezos (XTZ), Cosmos (ATOM), and Cardano (ADA).
Can You Make Money Staking Crypto?
Staking allows you to earn rewards based on the amount you have staked, and the rewards distributed to the staking pool you joined. Most crypto exchanges and platforms that offer staking rewards typically distribute payments on a regular schedule, resulting in an annual interest rate of 3% to 7% (or more).
As a validator on a proof-of-stake blockchain, you can earn rewards directly by staking more crypto, as your eligibility for adding blocks increases.
These rewards are typically given on a per-block basis, and new blocks are added regularly.
Rewards can be up to several thousand dollars per block, depending on the asset.
Where To Stake Crypto
There are several places you can stake your crypto, with centralized exchanges being the most popular (and easiest) option available.
Exchanges like Binance.us and Coinbase offer access to staking pools, which allow you to deposit smaller amounts into a staking contract, and earn a fixed reward. You can purchase crypto directly from the exchange, choose which coin to stake, and lock in your funds on the exchange to earn interest.
Decentralized Apps (DApps)
Some DApps offer staking of the native cryptocurrency of the platform to earn interest.
One example is Sushi.com, which allows users to stake the native SUSHI token to earn interest, as well as collect additional fee rewards. To do this, you can connect your digital wallet to the Sushi platform, choose the amount of SUSHI token you’d like to stake, and deposit your SUSHI tokens into the smart contract.
Utilizing DApps such as Sushi is a more advanced staking strategy, and comes with more risks than a centralized exchange.
Proof-of-Stake Blockchain Network
Finally, if you want to run your own validator node and collect block rewards directly, you can apply to join a proof-of-stake blockchain network that has openings available.
You will need to purchase and stake the minimum amount of crypto needed to run a node, which is typically much higher than joining a staking pool.
Every blockchain offers different requirements for running a node, and this may require purchasing dedicated hardware or running a virtual machine in the cloud.
Pros & Cons of Staking Crypto
- You can earn passive income rewards on deposited crypto.
- Helps secure the blockchain network.
- Easy to do on centralized exchanges.
- No equipment needs when joining a staking pool.
- Proof-of-stake is less energy-intensive than proof-of-work.
- Crypto is volatile, and locking crypto into a staking contract means you can’t sell if the price starts falling.
- Staking contracts may be vulnerable to cyber attacks.
- Withdrawing from staking pools may take up to a week (or more).
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