The most popular cryptocurrency, bitcoin follows what is called a Proof of work consensus mechanism. This means in order to validate the next block on the blockchain network, miners must ‘work’ using their computing power to solve complex equations. Miners participate in this proof of work model for potential rewards in certain cryptocurrencies, in this example bitcoin.
Many cryptocurrencies operate on proof of work blockchain networks, while specific cryptocurrency can operate via a proof of stake system. Proof of work requires significant energy requirements and a large investment in crypto mining equipment. The proof of work consensus mechanism is a good way for miners to earn passive income in a particular digital asset. However, given the large amount of energy and capital investment required, there has become a big push for blockchain’s to operate on the more efficient proof of stake model.
Proof of Stake or crypto staking has fast become a great way for investors to earn passive income from their digital assets. Oftentimes these staking services are being provided by Cryptocurrency exchanges, making it extremely easy to earn passive income for crypto investors on their crypto holdings.
Similar to Proof of work, proof of stake blockchains use a consensus mechanism to validate a new block within the blockchain. A consensus algorithm helps secure the blockchain through verified transactions. Crypto staking through proof of stake occurs when a user offers up their digital assets as collateral. This is also known as staked crypto or staked tokens. The owner of the assets participates in the staking process in order to have a chance in validating the new blocks. By taking part in the cryptocurrency staking process you become a validator.
By validating transactions from providing their crypto, a validator hopes to earn staking rewards in return. One of the unique features of proof of stake is that it is randomised, as opposed to proof of work which is more of a competition. Proof of work therefore incentivises miners to purchase more equipment. Whereas proof of stake, you are encouraged to support staking through earning randomised staking rewards.
Proof of stake is a more energy efficient way of processing transactions and offers validators a far greater chance of earning staking rewards than proof of work does. This energy efficiency is one of the key driving forces behind ETH transitioning to proof of stake.
Crypto staking is the process of providing some of your cryptocurrency holdings as collateral for the blockchain to validate transactions. In return for staking coins you will earn a staking reward.
You are only able to participate in crypto staking on blockchains that operate with a proof of stake model. Some of the more well known blockchains that offer staking rewards for crypto staking include; Solana, Cardano and Polygon.
It is very important to note the difference between crypto staking and crypto lending. Although these terms get used interchangeably all the time, they are very different concepts. There are different risks of staking crypto to lending crypto.
Crypto lending is where you provide your assets to a platform like Celsius. They then lend those assets out to institutional investors or use that crypto for advanced trading strategies. In return for lending them your crypto, you will earn interest. Often this is paid out weekly and you can withdraw the assets at any time.
The risks involved here are that you are putting your trust in a middleman, in this example Celsius. You trust them with your assets and that they will honour the interest payments and return your assets.
Crypto staking works slightly differently to crypto lending. The most important difference is that crypto staking utilises a decentralised network of validators. Therefore it mitigates the middleman risk and operates on a zero trust model. Your crypto also isn’t being used by others for trading activities.
Most staked assets will require a lock up period. That is a period of time you will commit to providing your crypto as a validator. You will be made aware of this before you start staking and longer lock up periods often offer the highest staking rewards. As your staked coins are adding stability to the network.
There are a couple of different ways you can stake crypto. But I will go through two different options in this post. You can either do it yourself via a staking pool, or staking through a cryptocurrency exchange.
Step 1: Buy some Cryptocurrency
This is the most important part in the process, Buying the cryptocurrency you want to stake. This is important because you need to ensure you buy crypto that supports staking. Remember proof of stake is used to verify transactions and only certain cryptocurrencies use this model.
For example some of the more popular assets are: Solana (SOL), Cardano (ADA), Polygon (MATIC) and Ethereum (ETH). Please note this is not investment advice. You should do your own research (on how to stake crypto) and read some white papers to get a better understanding of the different blockchains to help you choose.
Step 2: Transfer To Your Crypto Wallet
If you have bought your crypto on a platform like Swyftx, then you can stake from within the platform, meaning this is super easy. This is actually referred to as Delegating. Otherwise your crypto will be held in your cryptocurrency exchange of choice.
You will need to transfer your crypto holdings to your external wallet. If you don’t have an external wallet, there are free software wallets like Metamask or Phantom you can download. Alternatively, a hardware wallet is often the safest due to its extra security features.
Follow the steps from your specific wallet to deposit the assets into. Often this will include approving the wallet address from your crypto exchange and selecting the correct blockchain. Once you have approved the wallet address and double check you are using the correct blockchain, send your crypto to your crypto wallet.
Step 3: Join a Staking Pool & Stake Your Crypto
Staking pools operate in a similar fashion to how managed investment schemes do, they pool multiple investor funds together to invest. Instead of staking pools investing in an asset like property. They are pooling crypto together to increase the likelihood of being selected to earn rewards.
There are many factors that go into selecting an appropriate staking pool to join. Which I will highlight later in this post. For now, once you have chosen a pool to join, you can stake your crypto from your crypto wallet.
This process requires a bit of technical knowledge, which is why some people will prefer to stake using a suitable cryptocurrency exchange that provides crypto staking functionality.
As I mentioned above you can stake your crypto in either crypto pools or through cryptocurrency exchanges or platforms that offer the functionality.
You can stake crypto through the following platforms: Swyftx, Binance, Coinbase, Kraken, Kucoin, Crypto.com and eToro. These platforms allow you not only to purchase your crypto but also stake them within the same platform. This is often the simplest solution for most users.
Crypto staking offers investors the opportunity to earn rewards for putting their crypto up as collateral. This has proven to be a solid way for investors to earn rewards from their crypto holdings passively.
A key point to note though, is that the underlying asset value can decrease, which will far outweigh the gains made from staking. So it is important to understand the asset you are considering staking in the first place.
Staking crypto could be an interesting option if you believe in the asset and have a long term investing view. This is because often you can earn higher rewards for staking crypto for longer periods of time. So staking can be a good opportunity to gain extra rewards for holding an asset you love already.
If you like to trade crypto frequently, like day trading or throughout the week then you probably shouldn’t look at staking those assets through staking pools. As mentioned previously, most staking pools have minimum lock up periods and therefore your assets won’t be accessible.
Another option to be careful of is buying and staking crypto because of the high rewards on offer. Don’t buy a crypto purely because it has a high yield on offer. Often these yields change drastically and offer high yields to get more staked coins into the protocol.
Several popular crypto assets allow staking, and they can be bought on crypto exchanges. Some of the more popular assets include: Ethereum, Solana, Cardano, Polygon and Axie Infinity to name a few.
There are more crypto assets that offer staking, either through staking pools or on crypto exchanges. The easiest place to check first is with your chosen crypto exchange provider and seeing if they offer staking functionality. If they do, you will have a list of assets to choose from.
There are always risks involved when dealing with any investment, and cryptocurrency is no different. Staking crypto includes multiple risks as highlighted below:
The most obvious benefit of staking is the very attractive yields on offer for almost little work. Staking crypto can therefore help investors generate a return almost passively. Not a bad way to make some extra income for holding your favourite crypto assets.
Another benefit of staking cryptocurrencies is that you are part of the ecosystem supporting the blockchain. This may only appeal to those that love the underlying technology. However, this is an important factor, as it requires these people supporting the underlying infrastructure for the blockchain to succeed.
Another benefit of staking is that you don’t require any equipment. As opposed to Bitcoin miners that require significant investments in hardware and software. Staking is also extremely energy efficient, therefore reducing electricity consumption.
If you want to stake cryptocurrency directly, then it usually requires some technical knowledge. Delegating to a staking platform like an exchange is often easier and helps reduce some effort on your part. However, if you want to stake in a staking pool, here are some things to look out for.
If everyone were to choose the largest staking pool, then it would pose an inherent risk of attack. It is greater for the chosen network to have staked crypto across multiple validators. Not only does this help the performance of the network, but also reduces the risk of attack on the network.
Fees are always a big part in assessing anything relating to investing, whether its stocks, property or crypto. Therefore this is a big point to consider and see what fees are being charged. The lower the fee, the more crypto you will end up with in rewards. Although do consider there are costs associated with the validator’s operations. Therefore a small fee is reasonable
The performance impacts the amount of rewards earned by the crypto holders. If the validator becomes disconnected from the internet then that is a lost opportunity to be considered for the taking rewards.
If your plan is to buy and hold your cryptocurrency for a long period of time, then Staking could definitely be worth it. Staking helps provide the opportunity to make some passive income on specific assets.
The choice you would need to make is what type of staking would you want to use? Staking or Validating. Staking as mentioned previously requires some technical know how and an external cryptocurrency wallet.
An easier solution would be Delegating your crypto. Which is essentially staking your crypto on a cryptocurrency exchange, that offers proof of stake coins. This is extremely simple and the risk/reward can be very worth it.
For example, if you believe in Solana and want to hold it for the next 5 years. While you currently have it sitting in your crypto exchange account doing nothing. Then you could put it into their staking account within the exchange and start earning daily rewards.
There are risks involved with staking crypto as previously mentioned, so make sure you do your own research. If this seems too much, another alternative you could try is dollar cost average buying crypto.
You can’t lose your cryptocurrency from staking with a reputable validator or delegator. However, if you don’t practice correct security and password management, it is possible someone could get your private keys. If they get your private keys, then they would be able to hack your wallet and take your assets.
You can, however, lose the value of your assets. This would occur if the underlying asset you were staking decreased in value. For example, Ethereum drops 40% and you were only getting 8% APY. This would result in the value of your investment decreasing significantly.
No, staking cryptocurrency doesn’t increase the coin value. It does however help support the underlying network and validate transactions on the blockchain. You could argue that the more people that do this will lead to a more stable network. Which in turn could increase the value of the asset. However, that is all conjecture.
The exact returns vary from project to project, but the idea is to give token holders a chance at adding new blocks to the blockchain for a reward. The staked token serves as a security of the validity of all new transactions added on blockchains.
There is no guarantee that the yields on offer will remain at the rate they are. Just like there is no guarantee that by staking an asset you will be better off. If its value decreases significantly you could be worse off.
But you are able to increase the likelihood of earning rewards through selecting a strong staking pool, or through delegating with a larger platform. Such as a cryptocurrency exchange.
To sum up this post. In order to stake cryptocurrency the blockchain needs to use the proof of stake consensus mechanism for validating transactions. You can stake cryptocurrency either by yourself with some technical knowledge. Or via Delegating to a large platform like a crypto exchange.
The rewards are earned randomly, with more assets increasing your likelihood of winning the rewards. This means pooling assets together will increase the chances of receiving rewards.
There are some inherent risks associated with staking, although they mainly pertain to the underlying asset. Meanwhile, there are some nice benefits, including high passive yield.
Staking could be a great option to consider if you want your assets to work a bit harder for you and they aren’t currently doing anything. Just make sure you do your own research on the asset you want to stake and the pool or platform you want to use!
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