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Crypto mining was once the most common way to earn crypto, especially when cryptocurrencies were new. However, although rewarding, crypto mining can be resource-intensive and complicated. Therefore, investors seek easier ways to earn passive crypto income, such as staking.
The beauty of staking is that you don’t need to be a crypto expert to make money. However, it’s wise to understand how staking works before you invest. That is why we prepared this article to teach you what cryptocurrency staking is, how it works, and other important details. Let’s start.
What is Proof-of-stake?
Proof-of-Stake (PoS) is a consensus mechanism that came after the Proof-of-Work (PoW) mechanism. PoW is the method that Bitcoin uses to create new coins. Although effective, PoW can be energy-intensive.
The proof-of-stake model was developed to provide more efficiency than the proof-of-work model. Unlike PoW, PoS doesn’t need to solve math problems to mine crypto.
The proof-of-stake model uses cryptocurrency staking to validate transactions. Validators verify transaction blocks on the blockchain to earn staking rewards.
What Is Staking, and How Does It Work?
Staking is a popular method of earning passive crypto income. You have to commit digital assets to a blockchain network for a certain amount of time. You earn interest based on the amount staked and the length of the investment period.
The blockchain appoints some stakeholders as validators. Validators are responsible for verifying transactions and adding new blocks to the blockchain. They receive staking rewards when the network mints new coins.
Learn more about how crypto staking works.
How to Stake Crypto
Crypto staking is among the simplest crypto investments today. Here is how to stake crypto:
- Create your account with a crypto staking platform. If you don’t know of any good staking platforms, then keep reading, as we’ll discuss some excellent options later.
- Choose a digital asset to stake. Some platforms offer specific staking coins. Check if a platform has the coin you need.
- Top up your staking account.
- Start staking.
These are the steps you will likely follow, especially on a staking pool. The steps vary for validators.
Is Staking Crypto Safe?
Staking crypto is a safe and legit investment. However, it’s not risk-free. One of the risks of staking is volatility.
Most staking coins are volatile and thus experience massive price fluctuations. So, crypto investors who choose long lock-up periods could lose a lot of money if the price of the crypto they bet on drops. It’s best to choose staking platforms with manageable lock-up periods.
Read this article to learn more about crypto staking safety.
How Much Staking Rewards Should You Expect?
There is no exact answer to this question. Some staking platforms offer better rewards than others, even for the same cryptocurrencies. The reward rates for most cryptos range between 3% and 8%. Some cryptocurrencies might pay higher returns.
Other factors that determine your earnings are:
- The invested amount.
- The number of staking participants in the staking pool.
- The staked coin.
If you want to get a clearer picture of how much you can make staking crypto, check out this guide on how much you can make staking crypto.
Staking Fees
Staking platforms take a cut from your staking rewards to help cover running costs. Most platforms have low fees, so they probably won't affect how much money you make. Also, staking fees vary with platforms. Always check the different fees a platform charges before investing.
Read this article to learn more about how staking fees work.
Crypto Staking Regulation
Most governments are keeping a close eye on the crypto industry because they are worried that it could change the way traditional finance works. Some governments have even regulated some crypto activities, such as Bitcoin mining. Staking doesn’t have specific regulations yet.
This article dives deeper into how cryptocurrency staking regulation works. It also touches on how staking is treated when it comes to taxes.
This article dives deeper into how crypto staking regulation works.
Crypto Staking Taxes
The IRS has yet to provide specific guidelines for taxing crypto staking. However, general tax guidelines treat staking rewards as income. Therefore, you must report income tax on staking rewards.
Cryptocurrency Staking Insurance
Staking insurance covers losses from events like hacks. So, your crypto holdings are safe even if your staking platform suffers losses. There are different stakeholder insurance policies today, which makes it easier to find the best fit.
Check this out to learn more about crypto staking insurance.
Best Coins for Staking
Here are some of the best staking coins to consider:
Ethereum (ETH)
Ethereum initially operated on a "proof-of-work" model before shifting to a "proof-of-stake" model. It is now stakeable on a variety of cryptocurrency staking platforms. Ethereum staking rewards range between 4% and 7%.
Read this to learn more about how Ethereum staking works.
Solana (SOL)
Solana is a popular option on many stake-taking platforms. Its staking rewards range between 5.8% and 8%.
Cardano (ADA)
Cardano is another excellent staking asset that offers 4% to 8% staking rewards.
Avalanche (AVAX)
AVAX offers higher rewards than most staking coins. Its stake rates range from 3% to 21.63% on most platforms.
Polkadot (DOT)
Validators on this blockchain network can generally earn up to 10% APY from staking DOT.
Stablecoins
You can also earn rewards by staking stablecoins like USDT, USDC, and DAI. Some platforms offer up to 18.05% APY for staking USDT and USDC.
We compiled a list of the best stablecoins to stake.
Best Staking Platforms
The following are the best stake-taking platforms in the crypto space today:
- Binance
- Coinbase
- Kraken
- Ledger
- Trust Wallet
Learn more about the best staking platforms.
Staking NFTs
Some crypto platforms allow you to stake NFTs. This lets you profit from your NFTs without selling them. NFT staking has a fixed APY, and the amount of interest is based on how many tokens are staked.
Yield Farming vs. Staking
Here is how staking and yield farming compare:
Interest Rates
Staking offers fixed interest rates that start at 5%. This makes earnings more predictable. Yield farming rewards can go up to 100% and fluctuate often.
Security
Yield farming uses smart contracts, which are vulnerable to hacks. Also, yield farmers can lose their assets for good if they are locked up in a liquidity pool with a different number of tokens for each asset.
Staking uses validators to verify transactions and secure the blockchain network. Validators must follow strict rules to prevent security issues that may cause losses.
Lock-up Period
Staking requires you to lock up assets for a certain period of time to earn rewards. Yield farming has no vesting period.
Learn more about yield farming vs. staking.
Staking vs. Mining
Consensus Mechanism
Crypto staking uses a proof-of-stake consensus mechanism, while mining uses the proof-of-work model.
Mode Of Operation
Crypto mining involves solving tedious mathematical problems to mine new crypto. Staking means locking up assets for a certain amount of time in order to get rewards.
Equipment and Energy Consumption
Crypto miners use specialized equipment that consumes plenty of energy and isn’t environmentally friendly. Staking uses less power and does not require complicated equipment.
Learn more about staking vs. mining.
Pros and Cons of Cryptocurrency Staking
Advantages
- Staking allows you to easily earn passive income with your idle digital assets.
- You don’t need special equipment to stake crypto.
- Crypto staking consumes less energy and is more environmentally friendly than mining.
Disadvantages
- Staking involves locking up crypto assets. You can’t access your assets during the staking period.
- Your staked assets might lose some value due to volatility.
- You could lose assets if your private keys land in the wrong hands.
Learn more about crypto staking disadvantages.
Conclusion
Crypto staking is essential to the operation of proof-of-stake blockchains. It’s also a great source of passive income for crypto investors. Hopefully, you now understand how staking works and how you can use it to put your idle cryptos to work.
Disclosures
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument did in the past does not show how it will do in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to how important tax issues are in all lending situations, a customer who is thinking about borrowing money should talk to a tax expert to find out how taxes affect the outcome of any lending strategy.
