The new wave of cryptocurrencies is upon us and all the hype brings a lot of unfamiliar terms and concepts to those just beginning to investigate crypto. One of those "staking."
When you purchase crypto and stake it, you are saying you are claiming a certain number of coins and your purchase through a crypto exchange places your coins into a Proof of Stake (Pos) wallet. This is different from Proof of Work (PoW), which requires mining and creating complex algorithms to hold your coins.
There has been a lot of talk about the environmental impact of mining cryptocurrency with notables figures like Elon Musk and Elizabeth Warren claiming Bitcoin
’s mining consensus is an environmental threat. This means staking is a more environmentally friendly alternative to the consensus protocol Bitcoin uses. With proof of stake, the environmental concerns go away because there is no complex algorithm that has to be computed like with mining
in proof of work.
Read on to learn about how staking works, the pros and cons, and if it is something in which you should be interested.
What is staking?
Staking means crypto holders can lock up their coins in a cryptocurrency wallet to engage in the validation of transactions on a blockchain to also receive rewards in return. The concept stems from the fact that you “stake” your coins and at times you are chosen to validate the next block.
Usually, when staking, the funds that you are using towards the blockchain
have to be kept in the wallet that is earning staking rewards, meaning you cannot sell or trade those funds until you want to concede the rewards.
How do I start staking?
The process behind staking is very simple. For whatever platform you use, as long as they support staking, all you have to do is buy the asset that you are trying to stake and hold it in the crypto wallet. From that point on you may be earning passive income every second. For some forms of staking, you must enter a lock-up period where you cannot access the funds that you stake until the period ends. You must do your research to find out which exact platform and what kind of staking you want to do so you can find the best solution for you.
What types of staking are there?
Proof of stake (PoS)
When someone refers to staking, chances are they are just talking about the Proof of Stake consensus mechanism. This is the normal form of DeFi
staking that involves stakers locking up their tokens in a wallet to validate blocks in return for passive income.
Delegated proof of stake
The secondary form of staking is called Delegated Proof of Stake (DPoS) and shares some similarities with the normal proof of stake. In both cases, you are locking up tokens, however, with the delegated proof of stake, the tokens you lock up aren’t directly used as validators. Instead, the tokens are used as “votes” that are used to elect delegates that manage the blockchain for the voters.
Staking rewards in this case would be used to give to the delegates which would then be given to the voters that elected them. This type of consensus mechanism is better for the efficiency of a network but certainly makes things less decentralized as a network would be relying on a select group of validating nodes.
What can I stake?
Numerous coins are being added to the proof of stake consensus protocol, but we will go over some of the most popular ones below.
Ethereum (ETH 2.0)
is one of the most popular cryptocurrencies in existence and just recently has decided to make the major switch from its current Proof of Work consensus protocol to a Proof of Stake consensus protocol in a major update being called ETH 2.0. The major problem Ethereum has as a platform is significant limitations on scalability. The larger the transactions on the Ethereum network, the more congested it is, and, in turn, it is why Ethereum fees have skyrocketed. There are times when the cost of sending an Ethereum transaction costs more to send than the actual amount being sent over. Ethereum’s transition towards a proof of stake protocol would fix this issue.
Tezos is one of the first staking coins that arose in June 2018 as the biggest initial coin offering in cryptocurrency to date. Those that stake Tezos are required to hold about 8000 XTZ, however with platforms like Coinbase, they allow for those with even very insignificant balances to be able to stake XTZ and earn rewards.
Algorand claims that it created the world’s first pure PoS foundational blockchain. It allows you to create and deploy tokens, non-fundable tokens (NFTs), stablecoins, and currencies while also being a simple and cost-effective payment infrastructure. It was made to help lower cross-border payments. Typical staking APY for ALGO is around 6%.
Cosmos is a cryptocurrency created that allows you to freely exchange assets and data through what is called IBC or the Inter-Blockchain Communication protocol. This allows for communication across decentralized blockchains. An average annual percentage yield (APY) for Cosmos is about 5%.
Where can I stake?
As staking has grown in popularity so has its widespread accessibility in terms of how easy it is to get started. The chances are if you are involved in the cryptocurrency ecosystem one way or the other as current platforms allow for staking right now. Whether it is a cryptocurrency exchange, hardware wallet, or even mobile wallet, everyone has plenty of options when it comes to where and how they want to stake. The staking should work all the same with the only difference normally being the APY. These crypto platforms can carry out stakes.
Chances are if you are involved in cryptocurrency at all, you for sure know what Coinbase is. It is one of the largest cryptocurrency platforms on the planet. Coinbase
is one of the greatest staking platforms because not only does it have a variety of tokens, it allows you to stake with low balances which would otherwise not be possible.
All you need to stake on Coinbase is just $1 and the crazy part is that for most of the staking assets supported, you can earn rewards on them from the moment you deposit or buy the asset. Coinbase currently supports staking of up to 6% APY and includes Ethereum 2.0, Algorand, Cosmos, Tezos, Dai, and USD Coin.
One of the biggest and most popular platforms for cryptocurrency is the mobile wallet known as Trust Wallet. Trust Wallet has allows new users to get involved with many of the trendy meme coins that have risen to fame in the past couple of months, such as Dogecoin. Aside from that, Trust Wallet is a legitimate, secure mobile wallet that allows you to store and buy crypto.
Trust Wallet allows you to stake coins as well such as Binance Coin, Tezos, Tron, VeChain, Kava, IoTeX, Cosmos, Callisto, TomoChain, Algorand, and Pancakeswap. Trust Wallet allows you to earn rates of up to 130% APY at the highest for staking cake and 0.74% APY at the lowest for staking Tron.
Ledger is the most popular hardware wallet in existence right now. It is the ultimate cold storage wallet that allows for full security over your assets. Ledger allows you to stake up to seven coins at once, and the currently supported cryptocurrencies are Tezos, Tron, Cosmos, Algorand, and Polkadot.
How much does staking cost?
The cost to start staking is always free. Depending on the platform you are staking and the asset you are trying to stake, you may have to buy a certain amount of coins to begin staking, but this is not necessarily a cost because you are still getting all of the benefits of holding whatever asset you are trying to stake.
It is important to note that while staking can provide for some crazy APY’s on paper, the percentage of the yields changes very often and is very rarely a full indication of how much you would make staking whatever coin per year. You could consider the cost of staking the risk that you take when you buy the asset and enter a lock-up period because it can be nice to earn a high APY on a coin you are staking, but if the value of that coin goes down in that staking period it could mean that the staking rewards you received were not enough to compensate for the total value of the coins.
Pros and cons
- More environmentally friendly than its counterpart. As mentioned earlier, comparing Proof of Work to Proof of Stake shows that mining does not need to occur to validate transactions. This means there does not need to be tons of ASICs and rigs that take up significant loads of electricity to have a functioning network.
- Potential for high earnings. There are tons of places to start staking coins and the annual percentage yields on many cryptocurrencies can be extremely high. Especially on new and upcoming coins, the ability to not only just buy them to invest in them, but also earn more of that coin through staking is just a double bonus that can generate high earnings.
- Extremely easy To start. The great thing about staking is that overall it is very simple to get started. For most platforms, all you have to do to start staking is just buying the coin and then putting it in the wallet to be staked (for some platforms you can even just buy the coin and you don’t even need to do anything else!). Staking allows for straight-up passive income on many platforms without the need to do any work at all.
- Potential to lose money. Staking can have very high rewards, but the problem is that there is a risk you incur whenever you buy a coin to stake. If the coin you bought to stake were to go down in value, there is a chance that the staking rewards you received do not outweigh the potential loss from the asset you purchased while you were staking.
- APY’s are constantly changing. There are some very high APY’s and APR’s that are promoted when staking, but what is not told to you is that the rate of those yields changes very frequently and for most, it is even daily. One coin that has an APY of 130% one day could have a 10% APY the next. It is usually the more volatile coins that can swing like this, and when you factor in the APY swings with the price swings, it can be a disaster on returns.
- Risk of centralization. The biggest attraction of cryptocurrency is that it is decentralized, but a concept such as delegated proof of stake leads to centralization because there are just a few validators that would be running a whole network.
The bottom line
The fact of the matter is that staking coins is an easy and environmentally friendly solution for validating transactions on cryptocurrency networks. It can provide for a nice passive income. The barrier to entry for staking is remarkably low when compared to its alternative in the proof of work system. There is no need for any special rigs that you have to buy to mine and take up electricity and computing power. All one has to do to stake is just buy an asset and keep it in a wallet. It really is that simple.
Just remember, cryptocurrency does have its risks, but as long as you understand those risks, staking is most certainly a good recommendation for even the most beginner crypto user