Crypto Staking Basics
Staking cryptos involves committing your holdings to a particular blockchain network for it to confirm transactions. Staking is available for currencies using the “Proof-of-Stake” (PoS) consensus method to process transactions.
Peercoin, introduced in 2012, was the first crypto to use Proof-of-Stake. Proof-of-Stake represents a much more energy and computationally efficient alternative to Bitcoin’s Proof-of-Work (PoW) consensus method requiring miners to compete to solve computational equations for prizes.
Staking provides buy-and-hold investors with additional passive income, especially for some cryptos offering high-interest staking rates. However, before staking, you should understand its requirements.
How Staking Works
Crypto coins using the PoS consensus mechanism validate new transactions being added to the network’s blockchain.
Staking participants pledge their crypto to the network’s protocol, and from the pool of pledging participants, the protocol chooses validators to confirm the newest transaction blocks. The more coins an investor pledges, the higher their chance of being chosen as a validator.
For every new block added to the blockchain, new crypto coins are minted and provided as staking rewards to the new block’s validator. Generally, the reward matches the same crypto type the participant staked.
If you’re interested in staking, you must own a cryptocurrency using PoS, as not all cryptos allow staking. You then choose your stake amount before placing your request through a crypto exchange–simple.
The staked coins remain in your possession, but since you are using them as part of their underlying blockchain, you must manually un-stake them later. Investors often find minimum staking periods for some cryptos, wherein their coins must remain “staked.”
Since its inception, PoS has quickly gained popularity due to its efficiency with using (less) energy and computing.
Ethereum is switching to a PoS model and is already allowing people to commit their ETH (Ether) for staking. However, there is a significant base commitment of 32 ETH.
How to Stake Your Crypto
The staking process may be confusing at first, but it’s not so difficult.
Here are the basics:
Buy a Crypto Using PoS
Not all cryptos have a PoS consensus mechanism, so you must purchase one that does.
Here are the four top possibilities:
- Ethereum is transitioning to a PoS model and is the first cryptocurrency with smart contract capability giving developers the ability to create dApps.
- Cardano develops through peer-reviewed research and is eco-friendly.
- Polkadot allows different blockchains to interconnect through its “Parachains.”
- Solana offers fast transactions with low fees, designed for scalability.
Several PoS cryptos offer staking rewards–learn what is involved with each, and then buy on a reputable exchange when you have decided.
Stake on an Exchange or Add to a Wallet
Once purchased, depending on the exchange, you may be able to stake the crypto immediately through the exchange. This is the easiest option but look at the requirements before doing so. Otherwise, you will need to move the currency to a blockchain “crypto” wallet. Crypto wallets can be in software or hardware forms.
Once the wallet is set up, choose to deposit the currency in your wallet, which will generate a wallet address. Then, from your exchange account, choose to withdraw your crypto and copy the address from the wallet into the “transfer to” area.
Most cryptos use staking pools. Pools are where traders combine their funds to receive better chances of earning rewards. Make sure you research any pool first. There are a few things to analyze:
- Size. Small pools suffer from reduced chances of being chosen to validate blocks. However, they provide more significant rewards when chosen. If a pool is too small, it may outright fail. If a pool is too large, it may fail by paying an overly cheap reward. It’s a goldilocks scenario–try to find a mid-size pool.
- Reliability. This is easy to check: a pool’s servers should have little remaining capacity relative to 100% (i.e., 95% used); if their servers are down, your chance of earning turns to zero.
- Fees. Pools take a small cut of the rewards for providing the hardware and management of the pool. The cut depends on the crypto, but expect between 2% and 5% of the reward.
Once you have found a good pool, you can stake your crypto through your wallet to start earning.
For a comprehensive explanation of PoS, click here.
Blockchains use a consensus mechanism to validate their blocks, allowing the nodes to be in singular agreement about the chain’s state and its transactions.
PoS is the second most popular consensus mechanism behind PoW. Investors often prefer it to PoW given the extra crypto rewards.
Each blockchain has a set reward for a block’s validation, and if an investor’s stake is chosen to validate, they will receive this reward.
The primary benefit of staking is earning crypto at a very high yield (or “APY”).
Some yields reach up to 20% per year. With the right investment, your return compounds quickly.
Investors balance the fiat cost of the crypto against the possible staking gain. The more extensive the network, the larger the reward becomes.
Lastly, staking requires nothing in terms of equipment, unlike PoW’s “mining.”
Staking comes with two key risks, no matter the crypto.
First, volatility appears often elevated. No matter their levels, crypto enthusiasts understand the potential of price drops outweighing their potential staking rewards. More unstable coins offer higher staking yields on average.
Second, staking usually requires the locking or “vesting” your assets for a minimum amount of time. In other words, the crypto’s inherent blockchain requires liquidity to be handed over in exchange for a staking reward. It’s vital to know the minimum staking period first.
Is Proof-of Stake the Best Consensus Mechanism?
Many investors debate which consensus mechanism is best, with security taking center stage.
Bitcoin supporters admit that PoW uses an immense amount of power, although PoW blockchains remain more difficult to attack. As a result, security-focused projects choose PoW over PoS.
A third consensus mechanism, though less well known, is Proof-of-Burn (PoB). Here, miners “burn” or destroy their existing coins in exchange for the right to add new blocks to the blockchain and, in so doing, earn new rewards. Instead of using computational power, the required resources remain just the burned coins.
Finally, there is Proof-of-Authority (PoA). Rather than coins, PoA validators stake reputation. PoA networks are secured by validators that are randomly selected as “trustworthy entities.” This method is a more human approach, with staked reputation, making it more secure and sustainable. It also is highly scalable because it only needs a few validators.
Who Should Stake Their Crypto?
If you’re holding crypto for an extended time (for more than one month) and presently don’t have a plan to trade them, consider staking. It requires nothing further on your part other than liquidity.
If you don’t have any crypto to stake and are looking for one to invest in, consider the quality of the coin as a long-term investment first. Those preferring liquidity and relatively less volatility should seek alternative investments.
The PoS consensus mechanism has benefitted crypto projects and their investors. The PoS system allows for processing many transactions at minimal costs while also providing the network’s investors with additional passive income. So if your investment criteria matches the requirements of staking, it could be worthwhile for you.
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.
The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.