In traditional centralized financial systems, investors use their capital to earn additional income by locking it in savings accounts for prolonged periods of time. This presents banking institutions with investment capital while the investor earns passive income, a win-win situation for all parties involved. In a similar manner, a crypto investor can passively earn crypto by locking their crypto assets on a blockchain. This helps with the efficient and secure running of the blockchain, which makes it a similar win-win situation.
Staking explained
In crypto, staking is a process whereby one locks up their digital assets in return for crypto rewards. This then helps the blockchain validate transaction blocks on the network. In effect, you loan your assets to the network to help in its efficient running. Investors who stake their holdings get to earn either freshly minted tokens or a portion of transaction fees from the network. This way, they increase their holdings without necessarily buying more or mining. What’s more, staking offers interest at a much higher rate than that offered by most commercial banks.
Cryptocurrencies are built on blockchain technology. These blockchains are essentially public ledgers that can be accessed by all users on the network. Since blockchains are decentralized – are not controlled by a central authority, they need this level of transparency to ensure transaction validity.
For transactions to be permanently recorded on a blockchain, they have to first be collated into blocks, which need validation before they are sealed on the blockchain. Those who get to validate these transactions have to stake their holdings, which acts as an incentive to keep them honest. If such validators attempt to verify fraudulent or inaccurate transactions, they lose the assets they had staked, in what is known as slashing. However, if they successfully verify a block, they get rewarded in crypto.
How staking works
There are several ways to participate in staking. For one, you can stake your holdings using your own computer and propose to validate transactions on the network. Alternatively, you can assign your crypto to someone you trust and increase their chances of getting to validate a transaction and earn rewards, which you can later divide amongst yourselves. This is because the more crypto you stake, the higher your chances are of becoming a validator.
However, not all crypto tokens can be staked. To understand this, let’s define the proof of stake concept.
Proof-of-stake
Bitcoin was the first cryptocurrency to grace the markets and since then, has enjoyed the biggest market capitalization. The way to earn new BTC is to verify transaction blocks on the platform through a process called mining. This process requires the use of sophisticated computers and a large power outlay to solve an equation on the blockchain.
This method proved to be highly energy-intensive, which led to the introduction of the proof-of-stake consensus mechanism. In this new method, all validators had to do was put their holdings on the line, and they’d be allowed to verify new blocks on the blockchain. This process consumes far less energy and is a lot more efficient than its predecessor. Therefore, only those tokens belonging to blockchains running on the PoS mechanism can be staked.
What is the reward for staking?
As aforementioned, those who stake their crypto on blockchains get rewarded in crypto as an incentive to stake more for longer. Staked crypto earns interest just like a traditional savings account would. The interest rates may vary per network, but it is not uncommon to earn interest of between 30 and 40% annually. Pretty lucrative returns, right? Now let’s look at how staking can be achieved.
How to stake
There are several ways in which one can stake their crypto assets.
- Staking on an exchange
A crypto exchange is an online platform where participants trade crypto and other digital assets. Some popular exchanges offer staking, such as Binance and Binance.US, Coinbase, and eToro. However, these platforms will charge a commission for staking on your behalf.
- Entering a staking pool
Since not all exchanges support staking, most investors will prefer to join forces with individuals who run staking pools. This is where several crypto investors connect their wallets to a pool and accumulate their assets so as to stand a bigger chance of becoming validators on a blockchain. Such pools will have criteria of sharing rewards alongside other requirements. Before joining such a pool, you should do extensive research to ensure that the team behind the pool is legitimate and the criteria for sharing rewards are favorable.
- Becoming a validator
Validators are coin owners who stake their own holdings to validate blocks. Usually, it takes several validators to verify a single block, and once they do, the block is permanently stored on the blockchain. To become a validator, however, you’d need to have your own staking infrastructure, equipment that meets the hardware and software requirements, as well as download the entire transaction history on the blockchain. What’s more, most blockchains will have an entry fee for their validators. On Ethereum, for example, one needs to stake at least 32 ETH, which is roughly $81,500 at the time of writing.
How profitable is staking?
We have established that staking crypto offers more in the way of returns than saving your hard-earned funds in a traditional savings account. That being said, the yields you obtain from staking depend on the amount of crypto you stake and the duration you keep your coins locked. However, there are a few factors you need to consider if you wish to maximize your gains from this venture.
The token’s value
Some cryptocurrencies are inflationary by design, which means that they have an infinite supply, while others are deflationary, which means their supply is capped at a certain maximum. A good rule of thumb would be to stay away from inflationary tokens, as their value may plummet in the future if their supply dwindles. The limited supply of deflationary coins makes them perfect candidates for staking, as it ensures their value stays up as their demand rises over time.
The coin’s application
The demand for a token is heavily dependent on its practical use cases. If a coin is instrumental in decentralized finance, for example, it may see substantial demand over the years and consequently, have good value.
Best crypto for staking
1. Ethereum
Ethereum is the largest altcoin by market capitalization and one of the most popular networks for decentralized apps and games. Due to its popularity, the ETH coin is offered on most exchange platforms.
As aforementioned, to be an independent validator of Ethereum would set you back 32 ETH, which you’d be required to stake to qualify. This is quite a large capital outlay, which prompts many prospective staking enthusiasts to find alternative means. One of those is staking on an exchange, of which several exchanges offer this feature. These include the likes of Coinbase, Bitfinex, Binance, and Kraken. This could lead to substantial gains depending on the platform you use. Most platforms will offer interests to the tune of 4-10% annually.
Alternatively, you can always join an Ethereum staking pool, where several users contribute small amounts of ETH until the cumulative total qualifies the pool as a validator. This feature can also be found on most popular exchanges.
2. Polkadot
Polkadot differs from other blockchains in that it utilizes parachains in its structure. A parachain is an independent chain that runs parallel to the main blockchain but is completely compatible and interoperable with the latter.
To that end, staking on Polkadot takes a different approach. The way to do so involves what is known as a slot auction. This is whereby you lend your DOT holdings to an upcoming project on the network, which then attempts to become a parachain through an auction on Polkadot. If your chosen project wins and becomes a parachain, you get crypto rewards. However, if the project loses, you get back the entirety of your staked crypto.
There are several exchanges on which you can participate in these slot auctions. These include Binance, Kraken, and Huobi.
3. Tezos (XTZ)
Tezos is one of the easiest cryptocurrencies to stake. Most platforms that offer this service will typically ask for one XTZ or less and seeing as the coin costs roughly $3 at the time of writing, this makes its staking affordable to most investors.
You can stake this coin on popular exchanges such as Kraken and Binance. What’s more, some wallets offer XTZ staking, such as Ledger and Exodus. Depending on the platform you choose, you could earn anywhere between 4 and 10% in annual yields from this venture.
4. Cardano (ADA)
Cardano is a popular blockchain utilizing the PoS system and boasts transaction speeds of several hundred transactions per second. It is one of the best coins to stake as it allows investors to pull out their staked coins at any point in time. What’s more, most platforms that offer ADA staking set low minimum requirements, which makes it accessible to most investors. These platforms include popular exchanges like Kraken, Bitfinex, and Yoroi.
You can earn anywhere between 3% and 9% in annual returns from staking ADA. However, these rewards lose value over time if too many people join one single pool. For that reason, it is always wise to diversify the coins you stake for optimal returns.
5. Algorand (ALGO)
Algorand is a powerful blockchain that offers instant transactions and scalability thanks to its numerous validator nodes. To become a validator, you only need to stake one ALGO, which makes its staking highly accessible. Even on platforms that have high minimum requirements, such as Binance, it would only cost you a few hundred dollars to begin staking ALGO. Other platforms that offer this service include Coinbase and wallets such as Ledger and Algorand. The rewards for staking vary from 3 to 10%, depending on the platform you choose.
6. Polygon (MATIC)
Polygon is a blockchain that was created to enable Ethereum’s scalability. It is compatible with Ethereum and all its decentralized applications. This network validates up to 65,000 transactions per second (TPS), which is a significant improvement from Ethereum’s current 30 TPS.
You would need only 1 MATIC to participate in the Polygon network while staking would set you back 2 MATIC, which is approximately $3. This can be done on Gemini, KuCoin, FTX, among other platforms. The maximum yield from this venture stands at just above 14% per annum.
7. Binance Coin (BNB)
Binance is the biggest exchange platform globally. BNB, the native coin of the Binance Chain, is one of the most popular coins to stake. There is no required minimum stake, and recovering your staked coins takes seven days. Usually, returns range from 6 to 9% on average. However, they are highly volatile depending on the transaction fees on the network. To that end, it is not uncommon to receive yields of up to 30%. What’s more, you can conveniently stake this coin right on the Binance platform.
8. PancakeSwap (CAKE)
PancakeSwap is a popular decentralized exchange (DEX) on the Binance Smart Chain. Users of this platform can stake any CAKE they hold. In return, they can choose to earn rewards in CAKE or any other token. To stake CAKE, you first have to connect a compatible wallet with PancakeSwap. Once you’ve obtained rewards, you can choose to claim them or reinvest them on the platform in what is called yield farming. The returns from staking CAKE range from 30-42%, which is one of the highest rates in the market.
9. Solana (SOL)
Solana is one of the most efficient blockchains which was built with scalability at the forefront. It features fast transactions coupled with low fees. It is not possible to become an independent validator on this network. However, there are more than 600 validators with whom you can pool your resources and benefit from the staking gains. These gains may vary from 7 to 10%, depending on whether you use Ledger, MathWallet, Atomic Wallet, or Exodus to stake SOL.
10. SushiSwap (SUSHI)
This is a DEX platform that offers both staking and yield farming. Most investors prefer to stake their SUSHI because it offers higher returns. SUSHI can be purchased from the most popular exchanges, but you can only stake them on wallets like MetaMask and Atomic Wallet. The returns from staking range from 7-10%. These returns can be used as governance tokens or as a means of payment on various platforms.
Conclusion
Staking is the process of locking your crypto assets on a platform, in order to enable the secure and efficient running of a blockchain. In return, investors who stake are rewarded in crypto at a specified annual rate. Only those coins running on a PoS model can be staked.
