What is Crypto Staking: A Beginner's Guide
The concept of crypto staking, how it works, benefits and disadvantages.
Crypto mining was once the most common way to earn crypto, especially when cryptos 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 mechanism used by Bitcoin to mine new coins. Although effective, PoW can be energy-intensive.
The Proof-of-Stake model was developed to provide more efficiency than Proof-of-Work. 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. It requires you to commit digital assets to a blockchain network for a specified period. You earn interest depending on the staked amount and investment period.
The blockchain appoints some stakers 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.
You don’t need to be a validator to earn staking rewards. You can earn rewards as a staker on a staking platform.
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 any good staking platform, 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.
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. Therefore, crypto investors who select lengthy lock-up periods may suffer huge losses if the price of the staked crypto crashes. 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 cryptos 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 platforms take a cut from your staking rewards to help cover running costs. Fortunately, these fees are low on most platforms, hence unlikely to affect your earnings. 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 closely watching the crypto industry as they fear it might disrupt the traditional finance sector. 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 crypto 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 is 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 staking insurance covers 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 initially operated on a Proof-of-Work model before shifting to PoS. It’s now stakable on various crypto staking platforms. Ethereum staking rates range between 4% and 7%.
Read this to learn more about how Ethereum staking works.
Solana is a popular option on many staking platforms. Its staking rates range between 5.8% and 8%.
Cardano is another excellent staking asset that offers 4% to 8% staking rates.
AVAX offers higher rewards than most staking coins. Its staking rates range between 3% to 21.63% on most platforms.
Validators on this blockchain network can generally earn up to 10% APY from staking DOT.
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.
Read this article to learn more about the best crypto to stake.
Best Staking Platforms
The following are the best staking platforms in the crypto space today:
Learn more about the best staking platforms.
Some crypto platforms allow you to stake NFTs. This lets you profit from your NFTs without selling them. NFT staking uses a fixed APY, and interest is determined by the number of staked tokens.
Yield Farming vs. Staking
Here is how staking and yield farming compare:
Staking offers fixed interest rates that start from 5%. This makes earnings more predictable. Yield farming rewards can go up to 100% and fluctuate often.
Yield farming uses smart contracts, which are vulnerable to hacks. Also, yield farmers can suffer permanent losses if their assets get locked in a liquidity pool with an uneven ratio of tokens.
Staking uses validators to verify transactions and secure the blockchain network. Validators must follow strict rules to prevent security issues that may cause losses.
Staking requires you to lock up assets for a certain period to earn rewards. Yield farming has no vesting period.
Learn more about yield farming vs. staking.
Staking Vs. Mining
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 locks assets for a fixed period to earn rewards.
Equipment & Energy Consumption
Crypto miners use specialized equipment that consume plenty of energy and aren’t environmentally friendly. Staking uses less power and does not need complicated equipment.
Learn more about staking vs. mining.
Pros and Cons of Cryptocurrency Staking
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 lesser energy and is more environmentally friendly than mining.
Staking involves locking up crypto assets. You can’t access your assets during the staking period.
Your staked assets might lose some value to volatility.
You could lose assets if your private keys land in the wrong hands.
Crypto staking is essential to the operation of Proof-of-Stake blockchains. It’s also a great passive income source for crypto investors. Hopefully, you now understand how staking works and how you can use it to put your idle cryptos to work.