Staking crypto has been around since the beginning of PoS blockchains. It gives stakers rewards with juicy APRs while contributing to the blockchain security. So what does staking crypto mean? How to calculate the staking rewards. Let's explore everything about crypto staking for beginners with Coin98.
What is Crypto Staking?
Crypto Staking is the activity of depositing your crypto assets on blockchains to earn passive income paid in crypto. This keeps the blockchain consensus running and enhances security.
Stakers who stake their digital assets on the blockchain will bear no risks as long as it keeps running. Staking rewards is often slightly higher than the average bank interest rate. However, they can stack more crypto distributed by the blockchain.
How does Crypto Staking work?
Proof of Stake
Proof of Stake (PoS) is an eco-friendly consensus of blockchain that comes as an alternative to Proof-of-Work (PoW). The PoS consensus creates a decentralized network of nodes/validators. They hold crypto to participate in verifying blocks to earn crypto rewards accordingly. The more crypto in the validators are staked, the more selected chance and the bigger the rewards.
Some top-cap blockchains use PoS or PoS variants: Solana, Cardano, Avalanche, Polkadot, Tezos, etc.
You might be familiar with the terms Bitcoin and Ethereum miners as the two blockchains use PoW consensus requiring high-computational power. On the other hand, PoS can save up to 99% of PoW power consumption and scale faster in quantity.
For example, Ethereum power consumption with the PoW consensus spiked since investors joined the network to mine ETH. Therefore, if the Ethereum network scales, the power consumption will rise. The Ethereum foundation introduced Ethereum Merge - the new Ethereum with the PoS consensus to thoroughly solve the problem, saving up to 99.9% of Ethereum PoW’s energy usage.
PoS is the next-generation consensus, which brings scalability to the blockchain. It tackles many temporary challenges of the PoW consensus while maintaining a high level of security and decentralization.
Staking Rewards are distributed to stakers when they pledge their crypto assets. The more you stake, the more rewards you will receive in crypto.
For instance, if you stake ADA into Cardano pools, you will receive ADA rewards with an average APY of 5%.
Staking crypto on some blockchain might require investors to lock their tokens. Some don’t at all. For instance, staking ETH on Beacon Chain (Ethereum 2.0) requires investors to lock their assets until the Ethereum 2.0 upgrade finishes. In addition, the ETH rewards from staking are also locked with the token.
Another example of staking without any locking period is Cardano. On Cardano, stakers delegate their ADA into staking pools to earn ADA rewards. The delegated token and the rewards can be withdrawn at any time.
Some numbers you should know before Staking crypto
Investors should take the following numbers into account before staking cryptos on blockchains.
Emission Rate is a metric that determines how fast new cryptos are minted to the network. This will create inflation for the blockchain, and every investor should take it into account. The rate is defined in the whitepaper or tokenomics.
When staking on a blockchain, investors will receive newly minted crypto in return based on their stake. This will increase the supply of crypto, creating inflation pressure on the price.
For example, Solana has an annual inflation rate of 0.1%. The newly minted SOLs go to all stakers according to their proportional shares.
The inflation rate plus token release from early investors are huge factors fueling the pressure. On the other hand, transaction fees paid by users in crypto are also distributed to validators as rewards, reducing the inflation rate.
The lock period is an important factor that determines the amount of time you can withdraw your fund and redeem the rewards. This number is variable among blockchains, and we can name some notable examples:
- Solana (SOL): SOL delegators must decide the locking period before staking. The minimum for that is one epoch (about 2 days). During that time, staked SOL is not available for spending.
- Cardano (ADA): ADA delegators on the Cardano blockchain don’t have to lock their crypto assets to earn ADA rewards. This means they can stop staking and redeem the rewards at any time.
Before staking, we should understand how the staking process works. This will help us avoid the cumbersome inconvenience in case we need to use the fund.
There are over 10+ blockchains supporting crypto staking, and the list would be too long if we mention every detail. As a result, you should Do Your Own Research before participating in staking activities.
APR - The staking rewards
Annual Percentage Rate (APR) will let you know the number of rewards you will receive when staking. The bigger the number, the more rewards you will receive in crypto. Let’s explore juicy staking rewards on some top-tier blockchains.
Staking rewards on top blockchain vary from 4.4% to 14%, depending on the total market cap. Investors looking for stable income can stake in top-cap blockchains such as Solana, Cardano, and Terra with an approximate APR of 5%. In addition, investors can speculate their assets in medium-cap blockchains such as Avalanche and Near Protocol for higher APRs.
Stake on blockchains or on centralized exchanges
As mentioned, crypto staking is the activity of participating in the blockchain consensus to verify blocks to earn crypto rewards. Many newcomers mistake staking on blockchains with staking on centralized exchanges (CEX).
Staking crypto on CEX will not give you on-chain voting power. Besides the juicy crypto rewards, staking will empower you with the ability to vote on changes when you stake directly into blockchain validators. However, storing your assets on CEXs literally means the CEX owners have the utility over them.
As a result, you should choose to stake on platforms that suit you the most.
Investors can bump into some initial requirements to start staking crypto on blockchains, such as a minimal staked amount.
For example, Beacon Chain (Ethereum 2.0) demands investors to stake at least 32 ETH to become a validator.
Crypto Staking Explained
Advantages of Staking Crypto
Staking crypto can yield investors a decent return if it’s done right.
- Investors can compound their staking rewards. This means they can reinvest crypto rewards instead of stacking them to store in the wallet. However, blockchains with lock periods make this method inappropriate.
- It’s cheaper to run a PoS node than a PoW miner. To run a miner on PoW, investors need to set up a computational system with high performance to start verifying blocks to earn mining rewards. The PoW consensus needs a great amount of computational power to scale, while the PoS one does not.
- Staking crypto will enhance blockchain decentralization. The blockchain arbitrarily selects validators to verify the blocks and receive the rewards. As a result, crypto will not be condensed into a few validators. It’s dispersed across the network. The token price will be positively affected as crypto in circulation decreases. Staking crypto will settle the staked amounts in place and any transfer will disrupt the staking process.
- Juicy APRs can draw newcomers to the ecosystem. Among blockchains, there is a user base war. The blockchain with the most inhabitants has a higher chance to survive and grow faster.
⇒ The advantages of staking crypto are undoubtedly dominant. Blockchains and validators co-exist to thrive, which is a win-win situation. Investors receive stable income, and the decentralization and security of blockchain get enhanced.
Risks of Staking Crypto
Potential risks lie everywhere in the crypto space. It’s impossible to ensure any investment activity since risk management is often underestimated.
Depending on how the staking mechanism is designed with the blockchain, users might have to lock their crypto to earn staking rewards. This will not allow you to spend your fund if you’re in an urgent situation. If you deliberately withdraw your assets before the lock period, you might be fined with no staking rewards.
However, some blockchains have a staking mechanism that favors users’ sake. As a result, you should read the staking terms and conditions.
Your crypto investment is under inflation pressure from staking reward emission. You may start stacking or compounding the staking rewards, which will earn you more crypto. However, the crypto price might shrink as other investors sell them soon after the claim.
Besides the reward emission, the market sentiments influence the crypto price. It can rise multiple times in a bull market, but it can make investors desperate in the unfavorable one.
There is always a slight risk of a blockchain shutdown/hack. PoW will be vulnerable if some centralized entity owns over 50% of the validating power. This might be the same case for PoS blockchains since investors can stake an extraordinary amount of crypto in one validator or a validator network owned by a party.
How to make money with Crypto Staking in 4 steps
Before earning the staking rewards, we should weigh every possible option and consider an appropriate position with our current portfolio since everyone has their way of building and sizing the portfolio.
Staker or validators?
As mentioned above, staking crypto is the activity that contributes to blockchain security to earn crypto rewards in return. If you have crypto, you can be a staker or a validator, depending on your amount.
- Become a staker: This is the most basic and easiest way to earn crypto rewards from staking. Blockchain will adjust the minimal amount that benefits everyone, from goldfish investors to whales.
- Become a validator: This role on a blockchain is an obstacle for many crypto natives since it requires a certain amount of crypto as collateral and a validator setup. Thus, the reward is higher for node operators. The additional rewards to validators come from other investors who stake crypto in those nodes.
As a result, you should decide your position according to your portfolio since everyone is different.
Staking Crypto step-by-step
Here are the steps to start staking crypto:
Step 1: Do some research and opt for a blockchain with the staking mechanism. The previous sections introduced the top 5 blockchain platforms that distribute crypto via staking. Remember to select the one that fits your investment taste.
Step 2: Have crypto ready in the wallets.
Step 3: Select validators to stake. The rewards vary depending on the current state of the validator. Then delegate/lock your crypto to the selected validators.
Step 4: Do the math and manage the stake.
Best Crypto Staking coins
As mentioned above, crypto staking is only available for blockchains using the PoS consensus with validators. Selecting reliable blockchains is fatiguing for some newcomers. Thus, we will introduce you to the crypto staking blockchain list curated by Market Cap.
- Beacon Chain (Ethereum 2.0): 4.43% APR and 9.3% staked ETH.
- Solana (SOL): 5.9% APR and 75% staked SOL.
- Terra (LUNA): 5.9% APR and 43% staked LUNA.
- Cardano (ADA): 5% APR and 72% staked ADA.
- Avalanche (AVAX): 9% APR and 67% staked AVAX.
- Polkadot (DOT): 14% APR and 53% staked DOT.
The above numbers are updated on Apr 21st, 2022. The rewards will be distributed based on the number of staked cryptos.
Best Crypto Staking platforms
For newcomers, centralized exchanges are the go-to places to trade, transfer and stake crypto assets. However, storing crypto on CEXs can have some risks, such as policy changes, unfavorable regulations, and fewer rewards.
Coinbase is a cryptocurrency exchange dominating the U.S. market. It offers users to stake their crypto with APRs ranging from a few percentages to 5%. However, to stake on Coinbase, being a U.S. citizen is a must.
Binance is the largest crypto exchange in the world. The platform allows users to stake crypto directly with two-digit APYs. However, it requires users to lock their crypto for a specific interval. The shortest period is 21 days.
Besides the two mentioned centralized platforms, other CEXs also support users with crypto staking, such as Gate.io, FTX, Bybit, etc.
Decentralization is one of the core features of blockchain technology. CEXs are too centralized, while decentralized platforms are getting eyeballs. Besides staking crypto in wallets, staking platforms were launched on blockchains to serve the staking demand.
Lido Finance simplifies the staking progress across blockchains. It is now supporting staking crypto on Solana, Ethereum, Terra, Polygon, and Kusama. At the time of writing, Lido Finance ranks first among crypto projects by TVL.
The platform allows users to stake crypto for rewards and also mint staked tokens which are pegged to the stake. Users can use minted tokens on other supported DeFi platforms.
The Future of Crypto Staking
Staking crypto on blockchains can give users a sustainable yield while maintaining network security. It has been around since the beginning of PoS blockchains and it will keep distributing the rewards to validators and stakers.
There is a stake war among validators of a blockchain. The crypto market is evolving fast since new meta comes up every month such as DeFi 2.0, GameFi, Curve War, etc. In the stake war, validators fight for stakers who own considerable amounts of crypto.
The larger the amount a validator has, the bigger the chance of getting selected to verify data blocks and earn crypto rewards. Furthermore, with a higher staked amount, a blockchain validator owns stronger voting power for on-chain proposals.
Staking on crypto wallets outnumbers staking on centralized exchanges (CEXs). Currently, major CEXs are allowing users to stake directly on their platforms to receive crypto with a lower APY when compared to blockchain staking with the same amount.
For example, Coinbase offers a 3.75% APY for staking ADA while investors can stake for a roughly 5% APR on the Cardano blockchain. This also means that crypto holders are lending their voting power to CEX owners.
Some questions when Staking Crypto
Is Crypto Staking safe?
Staking crypto on blockchains is popular among the blockchain community since it gives a decent amount of passive income (about 4% - 10% APR in crypto). The staking yield is not as high as other super-yield investments like Yield Farming, Leveraged Lending, etc.
The blockchain secures staking, but hackers can manipulate the staking UI to deceive investors.
Why not all cryptocurrencies have staking?
In crypto parlance, staking is the incentive for investors to hold the crypto, which increases blockchain security. The PoS consensus is uniquely designed to have the staking feature while blockchains with PoW or other consensus do not.
Are Staking Rewards taxable?
Blockchain is a decentralized network that consists of nodes around the world. No countries have full control over the blockchain while it reaches a high level of decentralization. As a result, it requires lots of paperwork to tax someone on the blockchain.
However, governments can locally tax their citizens who have the staking activity tracked.
How are staking rewards calculated?
Before staking your crypto assets into validators, investors should calculate the estimated rewards. APR and the staking period are two main factors that affect the crypto rewards.
Besides those, investors have to consider deposit and withdrawal fees according to each blockchain. In addition, compounding the crypto rewards from staking is the widely-used reinvesting strategy.
Staking Rewards platform also provides a platform with a well-designed UI. Visit here: www.stakingrewards.com/
What is a Staking Pool?
Staking Pool is where investors stake their crypto assets. It combines crypto from inventors to increase the chance of getting block rewards. The staking pool will receive the rewards and proportionally distribute them among stakers.
That’s everything you should know about crypto staking. It can give investors a decent amount of passive income in the long term while exposing themself to lower the risks. Do Your Own Research and select staking options that can give the most out of your investment.
If you have any questions about Crypto Staking, don't hesitate to leave a comment below, the Coin98 team will answer your questions as soon as possible!