What is Staking in Cryptocurrency?
Staking is a way of allowing cryptocurrency and NFT holders to earn passive income on their digital assets. It’s not available for every cryptocurrency and staking is not the same for every digital asset. So, what exactly is staking?
Staking involves locking up a digital asset to participate in the running and maintenance of a blockchain. Stakers are rewarded for ensuring all network transactions are verified and secure. Staking is available on blockchains that use a proof-of-stake consensus mechanism.
How Does Staking Work?
As mentioned above, staking is only available on proof-of-stake (Pos) blockchains. Proof-of-stake is a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain.
Consensus mechanisms help to validate entries into a database to keep it secure. It is a protocol that ensures all nodes – devices connected and exchanging data with each other – agree on the legitimacy of transactions. Once these transactions have been verified, they create a ‘block’ in a ‘blockchain’.
Proof-of-stake works by randomly selecting node-operators, otherwise known as validators, to validate the next block of transactions. To be selected, validators must offer an amount of the network’s native cryptocurrency as collateral. This collateral acts as a guarantee that any new transactions they add to the blockchain are legitimate.
This will also enter them into a lottery to validate the next block. Blocks are validated by more than one validator. Once a specific number of validators verify that the transactions within a block are accurate, the block is closed. Validating a block earns the validator rewards, which are usually a small percentage of the amount of cryptocurrency they’ve staked.
How to Stake Cryptocurrencies
Staking is a fairly uncomplicated process, although there are generally two ways to participate. If they choose to, asset owners can become full validators. This often involves a considerable minimum investment, however. For example, becoming an Ethereum validator requires a minimum investment of 32 ETH.
Validators also need the technical knowledge and computational power to perform validations for 24-hours a day. This option is more risk-laden than the second, as there are some security considerations to bear in mind when running a blockchain node.
The second option is much more beginner-friendly. Exchanges like Coinbase and Kraken offer staking services. Users are able to stake their digital assets, without needing to become full validators. Users simply contribute an affordable amount of their holdings to a staking pool. This route comes with a much lower barrier-to-entry.
The minimum requirement for staking via an exchange is usually drastically lower than the alternative. The exchanges also do most of the difficult work and have clear step-by-step instructions on how to start staking.
The Advantages of Staking Cryptocurrency
There are several advantages to staking a digital asset. Staking is ideal for long-term holders rather than short-term investors. For those interested in selling their holdings in the future, once the price has (hopefully) risen substantially, staking can be an excellent option.
Staking digital assets is a way of earning passive income on the asset, without needing to sell it. Staking cryptocurrencies is often compared to depositing cash in a high-yield savings account. Holders can earn interest on their assets without needing to rely on centralised bodies, such as banks. Staking yields are also usually much higher than those offered by banking institutions. And it comes with less risk attached than cryptocurrency yield farming.
For example, Kraken offers an annual return of up to 23% on cryptocurrency staking. Considering the savings accounts offered by banks will typically earn between 1% and 5% per annum, staking could be a significantly better option.
It’s also relatively straightforward to start staking a digital asset. It may take a little longer to get used to compared to the traditional banking route, but it’s usually possible on cryptocurrency exchanges or within various crypto wallets.
For believers in Web3, staking is also beneficial to the staker’s chosen blockchain project. As Tanim Rasul, Chief Operating Officer and co-founder of National Digital Asset Exchange, says, “staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support.” Staking is valuable for all parties involved, whereas traditional banking methods clearly favour the institution, rather than the individual.
The Risks of Staking Cryptocurrency
Although a positive aspect of the cryptocurrency space overall, there are some risks and potential disadvantages associated with staking coins. For example, some stakable assets come with lockup periods. This is a predetermined, minimum length of time that the asset must remain staked before it can be accessed. The staker is unable to sell an asset until the lockup period is over, regardless of whether the price increases or decreases. Considering the price volatility of cryptocurrencies, investors may not earn enough interest through staking to outweigh any potential losses, should the price fall significantly.
Additionally, some cryptocurrencies don’t pay out staking rewards daily. Instead, stakers may need to wait an extended period of time to receive their cryptocurrency yields. This can make it difficult to reinvest any staking rewards, which could be problematic for larger investors.
Choosing to become a validator is also inherently risky. Validators are likely to incur penalties if the node they’re operating malfunctions or misbehaves.
To mitigate the risks of staking, investors can choose to stake cryptocurrencies that pay daily staking rewards and don’t require lengthy lockup periods. It also might be worth using cryptocurrency exchanges, which will delegate the stake on an investor’s behalf.
Which Cryptocurrencies Can Be Staked?
There are plenty of cryptocurrencies that can be staked. Below is a list of some of the most popular cryptocurrencies for which this is possible. There are also lots of smaller market cap cryptocurrencies that allow staking.
Polkadot (DOT)
Polkadot is a decentralised protocol that connects blockchains to one another. It has a strong focus on interoperability, meaning that value and data can be transferred across multiple blockchains.
Polkadot is also an excellent option for staking. The minimum amount of DOT required to stake can vary, although it is usually around 80 DOT. The contribution needed to run a validator node is considerably higher. DOT provides an average annual return of 14%, making it a great choice for those seeking to make passive income.
Be aware, it usually takes around 28 days to unlock any staked Polkadot tokens.
Cardano (ADA)
Cardano is a layer 1, third-generation blockchain that focuses on scalability, interoperability and decentralisation. For many, Cardano was at the forefront of the staking movement. Since staking was introduced during Cardano’s Shelley Era, many Web3 networks have utilised its staking model within their own projects.
In fact, over 70% of the total circulating supply of ADA is currently staked. This demonstrates the strength of Cardano’s staking model. Cardano offers a staking rewards calculator to help investors know in advance what their delegation yield will look like.
Depending on where you look, the minimum amount required to stake Cardano is only 1 or 2 ADA. This makes it a very affordable option for new investors.
Polygon (MATIC)
Polygon is a decentralised Ethereum scaling platform. It enables developers to build scalable and user-friendly decentralised applications (dApps), without Ethereum’s usual high transaction fees.
It’s also possible for anybody to become a validator on the Polygon mainnet. 12% of the total supply of MATIC is specifically allocated to staking rewards. Polygon prides itself on the accessibility of its staking feature. The low hardware requirements make it a great option for new validators. Polygon offers its validators 6.58% APR on their staked MATIC.
Those unwilling or unable to run their own nodes can become delegators. There is no minimum amount required to delegate MATIC. For example, holders of only 1 MATIC can potentially become delegators. Potential validators or delegators should be aware that there is an “unbonding” period for any staked tokens before they can be withdrawn.
Tether (USDT)
For investors unsure about staking cryptocurrencies due to their volatility, it’s also possible to stake stablecoins. The price of stablecoins are pegged to existing currencies. In theory, the price of Tether (USDT) should never fluctuate too far away from that of the US dollar. With this in mind, stakers can be relatively certain that their percentage yield will be profitable, because the USDT price should remain roughly the same.
Staking USDT also has the potential to return some substantial rewards. For example, KuCoin offers new users the option to earn 100% APR on any staked USDT, up to a certain amount.
This promotion isn’t available permanently, but it’s usually possible to earn around 12.3% per annum from staking Tether.
Staking NFTs
Non-fungible tokens (NFTs) are another digital asset that can be staked. NFT staking was primarily introduced as an incentive for holders not to sell their assets. Maintaining an attractive floor price of a non-fungible token is one of the key aims of any developer and their community.
NFT staking differs slightly from cryptocurrency staking, but the general aim is the same. The NFT is sent to a DeFi platform and is staked using a smart contract. Stakers earn rewards, although, unlike when staking cryptocurrencies, these are usually not a percentage of the staked asset.
NFT projects sometimes offer additional NFTs – often from a different project to the one being staked – as a reward. Alternatively, some NFT projects reward their delegators with the native token of the staking platform itself.
What Are The Best Staking Platforms?
As mentioned previously, using cryptocurrency exchanges is arguably the easiest way for new investors to stake their assets. Most major exchanges offer staking capabilities, due to its obvious attraction for their users. But with so many to choose from, what are the best staking platforms?
1. Kraken
At the time of writing, Kraken offers staking on 17 cryptocurrencies, including Cardano (ADA), Ethereum (ETH) and Algorand (ALGO). There is no minimum time required for locking up cryptocurrency with Kraken.
2. Gemini
Gemini allows users to stake over 50 cryptocurrencies on its site. This vast range of assets includes some not available on most other exchanges. Investors can stake Axie Infinity (AXS), Uniswap (UNI) and Decentraland (MANA), among many others.
3. KuCoin
KuCoin offers staking via the site’s KuCoin Earn feature. As mentioned above, KuCoin offers regular promotions to new and existing users. These promotions often dictate the percentage yield available on the digital assets available on KuCoin. There is also an excellent variety of stakable assets for investors to take advantage of, with over 50 on offer.
4. Coinbase
Coinbase’s staking offering is much weaker than some of its competitors. At the time of writing, users can only stake 10 cryptocurrencies on Coinbase, with a maximum APY of 5.75%. Coinbase is a relatively reliable and user-friendly platform, so it may still appeal to new investors.
