Staking is a way to earn passive income from using your cryptocurrency on the blockchain or letting 3rd parties lend your cryptocurrency to investors. It's one of the most widely used methods to earn funds using cryptocurrency, and it can earn you anywhere from 3% to over 10% annual interest on your digital assets. Other methods include crypto trading and mining.
The staking process on a blockchain involves locking up cryptocurrency on a proof of stake network to provide security and effectiveness to the network for an incentive, typically block rewards and transaction fees. This process is only valid for blockchains using Proof of Stake (PoS) consensus mechanisms, as proof of work blockchains use energy-intensive computer hardware to secure their blockchains.
Cryptocurrency Staking Mechanisms
Broadly, there are 2 types of staking consensus mechanisms: PoS and Delegated Proof of Stake (DPoS). With a PoS algorithm, you can lock a certain number of the network’s native tokens to validate transactions through the network. With a DPoS algorithm, stakeholders choose a delegate who is assigned the responsibility of becoming a validator or block creator in the network.
Stakeholders receive incentives for their positive contributions to the blockchains, but they also are penalized for negative impacts on the blockchain such as confirming a fraudulent transaction.
As a staker, you can benefit from earning transaction fees by applying to become a validator in a DPoS consensus mechanism and by earning tokens as rewards for staking. For staking on exchanges, you can be incentivized by holding or reducing transaction fees on the exchange. Staking also unlocks sharding in blockchains like Ethereum, which is a process that enables the network to reduce congestion and improve the transactions per second (TPS) using newly created chains called shards.
Staking on Ethereum’s Blockchain
The most popular blockchain used for staking is Ethereum. Ethereum is an open-source, decentralized blockchain that has smart contract utility made with the Solidity programming language. It allows developers to create and execute smart contracts and decentralized applications (dApps) that can be used on the blockchain. Ether is the native token of this blockchain. Ethereum originally had a consensus mechanism called Proof of Work but is in the process of transitioning to a Proof of Stake consensus mechanism in the shift to Ethereum 2.0.
You can use the Ethereum launchpad platform to stake your ETH. To stake on ETH 2.0, you would need a minimum of 32 ETH to become a validator. The platform currently offers a 6.6% annual percentage rate (APR). As a validator, you will be securing the Beacon Chain, which is the 1st upgrade of the ongoing transition to ETH 2.0.
You can also stake less than 32 ETH through staking pools offered by staking services. It’s also important to note that the site linked on Ethereum’s staking page beaconcha.in does not vet any of the staking services listed on the site. Always do your own research before picking a service for staking.
Staking Ethereum on Coinbase
You can also stake your ETH on one of the oldest cryptocurrency exchanges, Coinbase (NYSE: COIN). Once you stake your ETH on the exchange, it’s converted to ETH2, also known as staked ETH. The value of ETH is identical to ETH2. Your funds will stay locked up until the upgrade to the Ethereum network is completed. Once complete, your ETH2 will be converted back to ETH. You can earn up to 6% APR for staking ETH on Coinbase.
Currently, only investors residing in the United States can stake ETH on the platform, with the exception of New York residents.
Staking Ethereum on Binance
You can also stake the ETH in your wallet on the largest cryptocurrency exchange in the world in terms of volume — Binance. The platform allows seamless 1-click ETH 2.0 staking with an APR of up to 20%. It specifies that you can’t redeem the staked ETH in the 1st phase of the 2.0 upgrade — the implementation of shard chains. Binance converts your staked ETH into BETH, the tokenized version of ETH on Binance, converted on a 1-to-1 basis. In addition to using BETH for staking in the ETH 2.0 beacon chain, it can also be used in various ways on the Binance platform and the Binance Smart Chain (BSC).
Best Cryptocurrencies for Staking
In addition to Ethereum, there are several other cryptocurrencies you can stake on their respective blockchains. The most widely used of these cryptocurrencies are specified below:
- Cardano (ADA): ADA is the native token of the Cardano blockchain. Staking on the Cardano blockchain offers rewards provided in ADA. Cardano Incentivized Testnet (ITN) stake pools are ranked based on their performance, thus enabling you to choose a stake pool based on its historical performance. APR for staking Cardano is between 7% and 8%, depending on whether you are delegating ADA or running your own stake pool.
- Binance Coin (BNB): BNB is the native and utility token of the Binance exchange. The token can be staked on the Binance Smart Chain (BSC), which uses the Proof of Staked Authority (PoSA) consensus mechanism. This algorithm is a combination of Proof of Authority (PoA) and DPoS. Only 21 validators can stake on the platform to enable a shorter block creation time and lower transaction fees. BNB can be staked by being a delegator through the Binance Launchpool and Trust Wallet. You receive rewards 3 days after staking and currently, it has an APR of 4.64%.
- Tezos (XTZ): XTZ is the native and governance token of the Tezos blockchain. The staking process on the network is referred to as baking and requires you to stake a minimum of 8,000 tokens. The token can be staked on Binance with zero fees, while Coinbase and Gate.io charge 25% and 33% fees respectively. The APR is currently approximately at 6.8%.
Where to Buy ETH, ADA, BNB and XTZ
Tokens like ETH, ADA, and BNB are among the top 10 cryptocurrencies in the world by market capitalization. While ETH can be bought on all the major exchanges like Binance, Coinbase, eToro and Gemini, the other coins can only be bought on specific exchanges. On Gemini, ETH can also be used to earn interest through Gemini Earn currently providing a 2.05% annual percentage yield (APY).
BNB: This token can be purchased on Binance, FTX Exchange and CoinTiger.
ADA: You can purchase this token on Binance, Coinbase and Crypto.com.
XTZ: You can purchase this token from Binance, Bybit, Coinbase and Crypto.com.
Other Ways to Earn Interest on Crypto
In addition to earning passive interest income through staking, there are several other ways you can earn interest on your crypto similar to how the traditional banking system offers interest to account holders based on the funds they hold in their account. There are various platforms that enable you to earn interest on your crypto and also take out collateral-backed loans. A few of these are listed below:
- BlockFi: The BlockFi Interest Account (BIA) allows you to deposit ETH and earn interest on these deposits at rates depending on the amount of ETH you deposit.
- Celsius: The platform allows you to earn interest on a number of stablecoins and other cryptocurrencies, including ETH. The current APY is at 5.05%. This APY is variable, and depending on the cryptocurrency you choose the interest rate may differ.
- Nexo.io: This platform allows you to earn interest both on your deposits of fiat currencies and cryptocurrencies. In addition to other cryptocurrencies, ETH can be deposited on the platform at an 8% APR.
Is Staking Cryptocurrency Safe?
Even though staking is one of the commonly used ways to earn revenue from cryptocurrencies, there are various factors you need to be aware of before you stake your crypto tokens:
- Smart contract risk: Smart contracts are often vulnerable to malicious actors through hacking activities so you’re running the risk of loss of funds if the stake pool is affected. A good way to gauge the security of a smart contract is through the amount of funds already locked into the smart contract. If there is a lot of money locked into the contract, it’s likely safe to use.
- Liquidity risk: This risk is especially valid for micro-cap altcoins that do not have high liquidity on exchanges that would allow you to sell your crypto assets or any staking rewards that were earned. This isn’t much of a risk for cryptocurrencies like ETH, ADA and others that were covered in this article.
- Market risk: The lockup periods in staking processes lead to the risk of negative price movements. Despite earning a high APY for staking, it is possible to make a cumulative loss in your portfolio if the price of your staked assets go down.
In spite of these factors, staking cryptocurrency is a safe option to earn passive income through blockchain participation for the sake of security and efficiency. To mitigate these aforementioned risks, be sure to use a credible staking platform like Coinbase, Gemini or BlockFi.
Holding Cryptocurrency vs. Staking
With hodling and staking being the least risky options to earn profits from cryptocurrencies when compared to trading on centralized exchanges (CEXs) and decentralized exchanges (DEXs), it is interesting to compare the benefits and drawbacks between them.
- Staking often can be a complex process when compared to hodling, especially with the advent of staking in DeFi liquidity providers like UniSwap.
- Security is another concern when differentiating between the 2 options. While you can also HODL through your cold wallets that are offline and not connected to the internet, you can only stake your crypto through hot wallets that are usually connected to the internet and thus are more vulnerable than cold wallets.
- Because staking allows you to gather more tokens as compared to hodling, which entails a consistent number of tokens, the retention impact of staking is often larger in case of an adverse price movement.
Despite the few challenges that staking entails for you as an investor, it is an extremely popular, safe and sustainable way to earn passive income from cryptocurrencies as long as you have done your research about the token and platform you are using.
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