Crypto staking allows cryptocurrency holders to generate passive income while securing a blockchain environment and regulating transactions on the chain by verifying and confirming transactions initiated on the ledger.
In this article we will go in detail about what is crypto staking, how much can you make, and is crypto staking worth it?
What is Crypto Staking?
Crypto staking is a process created to verify and confirm cryptocurrency transactions, that way ensuring fairness and preventing double-spending.
Crypto staking is a mechanism employed by the Proof of Stake protocol (consensus mechanism) that relies on staking and stakes for verification of transactions instead of on miners like in the case of Proof of Work.
Crypto staking can be compared to keeping your funds in a savings account and letting your money work for you. When compared to the interest you would get with a bank savings account, crypto staking can generate higher yields with more profitable interest rates.
How Does Crypto Staking Work?
Crypto staking works by having a great number of cryptocurrency investors turn into holders – these investors are stakers as they don’t spend or sell their crypto.
Instead, stakers keep their cryptocurrency funds in their digital wallet while they are participating in the consensus mechanism, which is Proof of Stake.
Essentially, the network uses these funds to secure the network, confirm and verify transactions, and prevent double-spending, Stakers then receive monetary rewards in the form of cryptocurrency for allowing the blockchain network to use their crypto holdings.
The staked cryptos are kept in staking pools. Your funds are put to work in staking pools and are playing a role in securing the network, which is why stakers are being paid based on their stakes.
Not all tokens and cryptos can be staked – Bitcoin, for instance, uses Proof of Work and depends on miners to verify and confirm transactions as well as to generate new blocks.
What are the different types of crypto staking?
There are two main types of crypto staking based on two consensus mechanisms that are both based on staking, Proof of Stake (PoS) and Delegated Proof of Stake (DPoS).
In the case of Proof of Stake, stakers have their holdings placed in staking pools for a certain predetermined period during which their funds are used to secure the network and validate transactions.
In the case of Delegated Proof of Stake, stakeholders (crypto owners) vote for delegates. A delegate may either become a block producer or validator.
Validators and block producers, i.e., delegators, are rewarded for their participation in the network’s consensus mechanism.
However, this mechanism is not faulty proof as validators can still make a mistake. If a validator confirms a fraudulent transaction, there will be a penalty imposed in the form of monetary compensation.
Pros of staking crypto
Crypto staking comes with numerous pros, while the main benefit is generating passive income by letting your crypto funds work for you.
You can also earn transaction fees with DPoS in case you are voted to become a validator. Another benefit based on the type of staking is earning rewards in the percentage of tokens being transferred across the network.
|Crypto Staking Pros|
|An easy way to make a source of passive income by staking your crypto funds|
|From 10% to 20% annual interest on the funds you are holding at no cost aside from the price you paid for your staked cryptos|
|You become an important and integral part of the network by securing it and validating transactions|
|You don’t need any type of equipment or equipment as expensive as mining rigs for Proof of Work networks|
|Crypto staking is more environmentally friendly in comparison to mining which takes a lot of energy|
Cons of Staking crypto
The main risk of cryptocurrency staking is reflected in the fact that the market of cryptocurrencies is highly volatile.
Cryptocurrency assets are susceptible to frequent and sometimes highly unpredictable changes, which means that the price of cryptos can quickly drop or rise.
Cryptocurrency prices depend on a great variety of factors that can influence the value of cryptos to rise and fall in a relatively brief timeframe.
|Crypto Staking Cons|
|The crypto market is volatile, which means that the value of your funds may dip, that way cutting your earnings in interest|
|Risks due to the liquidity of crypto – in case you have invested in a micro-cap coin, it is likely that it has low liquidity, making it harder for you to cash in your interest|
|Some assets come with locked periods, which means that you are not able to withdraw or cash in on your funds until the locked period expires|
|Validator risks involve confirming a fraudulent transaction and being penalized|
Is staking crypto worth it?
Staking cryptocurrency is an excellent way of generating passive income. Cryptocurrency staking pools also pay out greater interests in comparison to bank savings accounts, from 10% to 20% annually on average.
This renders crypto staking as a useful mechanism for making a profit from crypto without day trading. Staking cryptocurrency is also more cost-effective than mining crypto as it doesn’t require any expensive mining equipment and a lot of energy.
Staking has also shown to be a more efficient way for blockchain networks, making transaction validation less competitive and more efficient.
You can make significant profits with crypto staking based on the funds you hold, which is a great way to “employ” your money to work for you.
How to make money staking crypto?
The first step in the process of staking crypto and making a profit on your staked crypto funds is learning more about Proof of Stake cryptocurrencies.
Some of the top Proof of Stake cryptos that can be staked in pools are Cardano (ADA), Polkadot (DOT), Solana (SOL), Tezos (XTZ), and Terra (LUNA). Ethereum can also be staked with version Ethereum 2.0 as the network migrated to the Proof of Stake consensus mechanism.
There are other PoS coins that you can stake for interest, but make sure to research liquidity and other important metrics, including price, as your earnings depend on the value of your funds that are susceptible to frequent changes.
Once you research the market, buy the crypto you want and in your chosen amount. Once you buy the crypto, depending on the coin you bought, you can stake your cryptocurrencies through an exchange or a staking pool.
In case you are staking in pools, you will need to transfer your funds from an exchange where you purchased coins, to your digital wallet.
Many staking pools will ask for you to lock your funds to stake them. Once you are rewarded with interest and your funds are unlocked, you can sell them for profit on exchanges or keep staking.
How much can you make from staking crypto?
The amount of money you make from staking cryptos depends on the number of cryptos you have. Your earnings also depend on the value of the coins you are staking.
Most PoS cryptos that can be staked pay from 5% to 20% interest on your staked holdings, while you can also find coins that generate 1% daily interest.
Most coins have locked periods from one to six months, but there are various holding periods.
How do I start crypto staking?
You can start crypto staking by simply buying a Proof of Stake crypto for the amount of choice. Coinbase might be the best way to start staking if you are only beginning as you can start staking coins right at the exchange where you bought the crypto.
Coinbase has a crypto staking program, allowing you to start staking and earn interest in only a few steps. Coinbase crypto staking is available in many countries and most of the US.
BlockFi also offers a handy and easy way to start staking your coins through BlockFi interest accounts. Perhaps the most interesting element in BlockFi staking is earning interest on holding cryptos that are not Proof of Stake.
You can stake Bitcoin (BTC), Ethereum (ETH), and over ten more cryptos via BlockFi Interest Account. You can earn up to 9.5% APY on your staked funds.
What are the best cryptocurrencies to stake?
Some of the top coins for crypto staking are:
You can earn around 6% interest on your funds with Tezos (XTZ), while validator’s fees will be deducted from your reward.
You can earn from 8% to 10% with Cosmos (ATOM) staking.
Staking Algorand can help you generate from 5% to 6% yield on your staked coins.
Staking your VET tokens to run a node may generate income between 1.87% and 2.27% annually. Holding VeChain will earn you VTHO tokens at the rate of 1.34% every year.
Staking SNX asks for a minimum of $600 in collateralization ratio, where a staker would receive $100 in sUSD on $600 staked SNX. The collateralization ratio changes with the changing value of both sUSD tokens and SNX.
If you decide to stake NEO on Binance for 15 days, you will receive 5.79% interest, and 7.49% for 30 days locked period. Staking NEO on Binance for 60 days will bring you 8.79% in interest rates.
You can earn up to 4% by staking Terra (LUNA).
Polkadot is one of the most profitable coins for staking. Staking DOT weekly will get you 13% in staking rewards. You can also earn from 9.50% to 12% compound rate for daily staking.
Ethereum staking on Coinbase will get you up to 4.5% of rewards on your staked coins.
You can earn up to 2.64% on your staked NEO tokens.
You can make a profit of 3.49% in interest rates annually.
The reward rate for Icon (ICX) is 12.94%.
Staking EOS on Binance for 60 days can generate 5.21% interest rates, with 4.69% for staking EOS for 30 days, and 14.69% for staking EOS for 10 days.
Binance Coin (BNB)
Binance allows users to earn up to 27.49% compound interest on staking BNB for 15 days locked period. If you lock BNB for staking for 30 days, you can earn up to 8.49% on your funds, 12.49% for 60 days, and 16.49 for a 90-day locked period.
Is it legal to stake crypto in the United States?
Staking cryptocurrency is legal in the United States, while all stakers need to pay taxes on their income generated through interest rates from staking.
You will have to pay taxes on the rewards you receive for staking as this profit is recognized as a taxable event, just like in the case of collecting gains from trading cryptocurrency.
You need to determine how much you need to pay in taxes by recognizing income in the amount of the rewards you received. Once you receive your rewards, assess its FMV (Fair Market Value) and calculate your interest in US dollars.
Is staking crypto safe?
Staking crypto involves a dose of risk in the sense of owning and staking highly volatile assets. Staking cryptocurrency is safe if you make sure to research any cryptocurrency you want to buy and stake.
Your staking rewards depend on the number of staked coins and the price of that crypto in the market, and since cryptocurrencies are volatile with some coins having low liquidity, staking crypto does come with a dose of risk.
However, staking cryptos is still a more predictable way of earning when compared to trading cryptocurrencies. In a nutshell, staking crypto is perfectly safe and can pose as a reliable way to make a passive income.
Can I lose money staking crypto?
You can’t lose money staking cryptocurrencies. Unlike the case with cryptocurrency trading where you can lose money in case you sell your crypto at the price lower than its value when it was purchased.
By staking cryptocurrency, you are participating in the process of providing liquidity to the network, as well as participating in confirmation of transactions.
Essentially, you can’t lose money while you are staking crypto unless you are penalized as a validator on certain blockchain networks with a PoS consensus mechanism.
Which crypto has the highest staking rewards?
Some of the most profitable coins to stake based on the interest rate and highest staking rewards are Binance Coin (BNB), Polkadot (DOT), EOS (EOS), and Icon (ICX).
In conclusion, crypto staking is a great way to earn passive income from your cryptocurrency investments. By holding coins in a staking wallet, you can earn rewards for participating in the network.
There are many different staking wallets to choose from, so be sure to do your research before selecting one. And remember, always use a secure password and two-factor authentication to protect your funds.