Investing in cryptocurrencies comes with significant risk. You could lose all the money you invest. Please read our risk warning here.
Staking is a common term in the crypto world. It gives crypto investors the chance to make money without doing much or anything at all. It also comes with fewer risks and more opportunities than active trading. As a result, hundreds of billions of dollars have been poured into this industry, and more keep coming.
So, are you thinking of joining this industry? If this is the case, you're probably wondering how much money you can make from crypto staking. You may wonder if you can make a living off of it or if it's worth your time and stress. On the other hand, you may have been reaping staking rewards for some time but are now wondering if you can earn even more.
This article is for you if you are in either of these two situations. We will discuss how crypto staking works, what determines how much staking rewards you'll get, and why the rewards rate is not the most important thing to look out for when joining a staking pool. First, let us start with a definition.
What Is Crypto Staking?
Staking is when you lock up your cryptocurrency in a staking pool to get rewards. This process probably started with Peercoin in 2012, which was the first known proof-of-stake (PoS) coin (more on that later).
Even if they don't know it, when crypto users stake their assets, they help make the blockchain more secure. This is because stakers on a PoS blockchain are responsible for validating transactions and minting new tokens. Therefore, it's a win-win situation for both parties involved: the stakeholder gets rewarded, and the blockchain grows stronger.
Read this to learn more about crypto staking.
How Does Staking Work?
To understand how crypto staking works, three terms must first be understood. There are consensus mechanisms, proof-of-work, and proof-of-stake. Let's define each of them.
A consensus mechanism is a universal standard that a blockchain uses to validate transactions. It is one of the most important aspects of a blockchain's network because it brings order to the extensive network of decentralized nodes that run the blockchain. It's like the blockchain's set of rules that make sure it stays consistent, open, and unchangeable.
There have been different consensus mechanisms in the crypto world, but the two most common ones are the proof-of-work and proof-of-stake mechanisms.
The first cryptocurrency, Bitcoin, adopted the proof-of-work consensus mechanism as the standard. It is a system that requires blockchain validators to 'work' by solving complex and arbitrary mathematical puzzles. The first miner or group of miners to solve the puzzle wins the right to add new blocks to the blockchain and is rewarded with new coins. The proof-of-work consensus mechanism is the standard adopted by Bitcoin, the first cryptocurrency. It is a system that requires blockchain validators to 'work' by solving complex and arbitrary mathematical puzzles. The first miner or group of miners to solve the puzzle wins the right to add new blocks to the blockchain and is rewarded with new coins.
The proof-of-stake consensus mechanism is different. This system requires validators to lock up or stake crypto assets in a blockchain's smart contract protocol. They are then randomly selected to add blocks to the blockchain and gain new tokens as rewards.
The proof-of-stake mechanism is usually preferred to the proof-of-work mechanism because it requires less energy and is kinder to the environment. Examples of blockchains that run on PoS are Solana, Cardano, Tezos, etc.
So, with this background knowledge, here is how crypto staking works in a nutshell: you lock up your tokens on a blockchain that uses the PoS consensus mechanism and get rewarded with new tokens.
Learn more about how crypto staking works.
Why Should You Stake Your Crypto?
There are several reasons why staking crypto benefits all parties involved. They are:
Convenient Earning
In most cases, you do not need to set up your staking infrastructure before you earn crypto staking rewards. You can simply join staking pools or crypto exchanges that offer staking. These platforms will act as validators, and the crypto investors who give them their tokens will get a share of their rewards.
Even if you want to set up your infrastructure and be a validator, it is still a convenient means of earning passive income. You only need to get the required instruments (a computer with high processing power and the minimum staking requirement). Subsequently, the computer does most of the work and sends the rewards to you.
Providing Liquidity
When you use staking pools or crypto exchanges to stake your assets, you give them much-needed liquidity and help them work. You are not merely doing this for charity, though. Many crypto exchanges offer staking promotions occasionally to attract new customers.
These promotions may involve a higher reward rate or lower entry requirements. So be on the lookout for these promotions. You might just grab one of them and benefit yourself and your crypto exchange.
Bear Market Survival
In a bear market (a period when crypto prices keep falling), there is a lot of pressure to sell your coins. But you don't have to, you can stake them instead. Staking is one of the best options for smart crypto investors who want to hold on to their coins. This is because you keep earning more tokens, even if the price keeps falling. And then, when the bear market passes, your portfolio value increases exponentially.
What Determines Staking Rewards?
The rewards you get from staking depend on multiple factors, like:
- Staking platform used
- Number of stakeholder participants
- Staking weight
- The crypto you stake and some other factors
We will now talk briefly about the four factors mentioned above.
Staking Platform
Different types of platforms use staking as a way of generating passive income. Some platforms do indirect staking and ask other people to give them their tokens in exchange for a fixed reward. Other platforms are less centralized and let users add their tokens directly to pools for staking and liquidity.
Most of the time, decentralized staking pools offer better rewards than centralized platforms because they get their money straight from the source and have fewer third parties messing with them. Still, as we will see later in this article, a high reward rate is not always good.
Number of Staking Participants
The higher the number of stakeholder participants, the lower the rewards distributed. That is usually the case with those who delegate their coins to a blockchain validator. Think about it: A validator receives rewards directly from the blockchain and has to share them with all the delegators. Therefore, the fewer delegators there are, the more rewards each will get.
Staking Weight
Staking rewards are often given out in percentages instead of fixed figures. So, the more you stake, the more rewards you earn. For example, an 8% APY for 50,000 staked SOL is 4,000 SOL, while the same 8% rate is 4 SOL if you stake only 50 tokens.
Staked Crypto
Some coins offer more rewards than others. Others offer fewer rewards but are more valuable. Also, if you are staking on a crypto exchange that has a native token, you may get more rewards if you stake the exchange's platform token. We will suggest some profitable coins to stake later in this article.
Are There Any Risks Involved?
Even though staking is generally less volatile than trading crypto, it still presents certain risks. Take a look at some of them below:
Platform Risk
Despite the fact that there are numerous crypto-staking platforms, not all of them are secure. Hackers may attack some, and others may run out of money and go bankrupt. Also, if you are a direct validator, there is a chance that the blockchain network could cut your stake as a punishment for what it thinks are mistakes.
Market Risk
Cryptocurrencies are generally volatile assets. Thus, you cannot really predict how much you will gain from staking crypto assets. Even if you stake stablecoins, you still cannot sleep with your two eyes closed because of the disturbing cases of de-pegging in some sectors of the stablecoin industry.
Inaccessibility Risk
In most cases, you may need to fix your crypto stakes with a staking protocol for a specific period. Thus, your assets are inaccessible to you, no matter how badly you need them afterward. Even though some crypto exchanges offer flexible staking to combat this risk, the rewards with flexible staking are usually lower than with fixed staking.
Therefore, staking rewards are not the only thing to consider when thinking of staking. You should also weigh these risks and determine if you can take them before starting. After all, what is the purpose of earning more rewards if you will eventually lose them?
How to Stake My Crypto Assets
Here are the things you need if you are considering crypto staking as your next investment strategy:
Crypto
You can't stake out of thin air, so you must get your hands on the crypto assets you plan to stake. You can either buy crypto through your bank or payment processor; or swap it for other cryptocurrencies at an exchange or Dapp (decentralized application).
Staking Platform
This can be done through a central exchange, a decentralized staking pool, or the direct staking interface on the blockchain. Each platform has its own set of rules and rates, so you should check them out before starting a staking arrangement with them.
For example, most centralized platforms will require KYC registration before letting you stake. On the other hand, decentralized platforms will likely not ask you for KYC, but they may require a higher minimum stake than their centralized counterparts.
You can check out our article on the best crypto staking platforms to learn more.
Specialized Computers
This is only needed if you want to be a direct validator on a blockchain network. To keep your computer from being hacked, it needs to be online most of the time. This means you need special equipment. Slashing is a validator's worst nightmare and may mean the loss of its entire stake.
Validating nodes usually need the same amount of processing power from one blockchain to the next. If you're thinking about being a validator, check out this guide to see the hardware requirements for validating on the Solana blockchain.
Best Coins to Stake
So, now it's time to talk about some of the most profitable coins to stake. Note that most staking APYs are dynamic; therefore, what you see below may not always be the case. Still, these coins have proven consistently profitable over time.
Solana
Solana is among the top 10 cryptocurrencies by market cap and one of the cheapest alternatives to the Ethereum network. When Solana staking first began, the reward rate was 8% and was set to decrease by 15% each year. It is now 5.78% and will keep reducing by 15% until it reaches 1.5% per year.
Note that the rates described above are the direct rates given to validators. If you are a delegator, what you will get will vary based on the fees your validator charges.
Cosmos (Atom)
Cosmos staking initially started with a 19.3% annual interest rate. Now, it offers staking rewards at a 6.65% adjusted rate for validators. The lock-up period is 21 days, and you must stake at least 49,719 ATOM to be a validator. Delegators have no minimum staking requirement.
One major advantage of staking Cosmos is the frequency of airdrops gifted to stakers. There have been many airdrops so far, and more keep coming. Each airdrop comes with its own requirements, but Cosmos staking is usually in the middle of it all. Read this for more information on Cosmos airdrops.
Ethereum
Ethereum is one of the hottest coins in vogue right now. And that is thanks to its proposed shift from the PoW to the PoS consensus mechanism in September 2022. This shift is one of the most widely anticipated events in the crypto world and will likely make the Ethereum network even more valuable. So, if you can get your hands on some ETH, do that and find a way to stake it.
BNB
BNB is the platform token of Binance, which is the biggest cryptocurrency exchange in the world in terms of trading volume. Therefore, staking BNB on Binance is sure to yield impressive returns. For example, locking your BNB tokens up for 120 days on Binance yields you a sweet APR of 12.99%. Also, you can stake your BNB in the BNB vault and watch as your crypto earns rewards in different assets.
Read this guide to learn more about how staking fees work.
Parting Words
So, how much money can you make staking crypto? It all depends on the coin you stake, the staking platform you choose, how much you stake, and how many co-stakers you have. However, even though staking can be very profitable, watch out for the risks described above.
So if you have decided to join the staking industry, we hope this article will be part of your success story as you sit back and watch your portfolio grow. Also, check out our detailed resources on crypto staking and other crypto investments.
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 the importance of taxes in all staking transactions, a customer who is thinking about staking should talk to a tax expert to find out how taxes affect the outcome of any staking strategy.
