There are more people buying crypto than ever before, but the crypto market fluctuations that occur on a day-to-day basis certainly aren’t for the faint at heart. As any seasoned crypto investor will tell you, it’s not uncommon for crypto investments to drop or climb by huge percentages from one day or one hour to the next — which can be a lot to handle for more conservative investors.
But what if there were a way to earn more crypto while waiting for price appreciation? And what if this was a safe way to smooth out short-term turbulence? Well, there is — it’s called crypto staking, and for many investors, it can be the key to finding a balance between active investing and passive income. By staking crypto, you can grow your crypto assets with the help of staking rewards while holding your position and benefitting from future price gains. If you’re new to crypto staking, here’s what you need to know.
What is cryptocurrency staking?
Most cryptocurrencies use one of two methods to validate transactions on the network: proof-of-work and proof-of-stake.
Proof-of-work is a method in which computers work to validate transactions by solving for a correct hash value. Proof-of-stake, on the other hand, works much like voting. When currency holders “stake” a crypto asset, the amount they stake adds to the voting power of the network. These votes determine whether transactions on the network are valid.
Staked coins earn a reward for participating, and the rewards are usually expressed as an annual percentage yield (APY). However, there’s no need to stake your crypto assets for a full year to see returns. You have the option to stake your coins for a few days, a few months, or a few years.
How does staking work?
In many ways, staking cryptocurrency is similar to owning a rental property. When you own a property, you can collect rent in return for letting someone else use the property.
In the case of staking, you collect returns, or “rent,” for delegating your tokens to a validator to vote on the next valid block via the cryptocurrency network. You still retain possession of the asset, however, and once the network is done utilizing it, you can allow it to be used for staking purposes again, or you can choose to sell it or hold onto it instead.
When you stake crypto, you’ll earn rewards periodically — with the payout and rate varying for each cryptocurrency. For example, Ethereum (ETH) pays out rewards for staking every 6.5 minutes on average. By comparison, Cardano (ADA) rewards are paid out every five days on average. And, the rewards for staking Solana (SOL) are generally paid about two to three days apart.
The duration between staking reward payouts is called an epoch. Because the amount of time can vary, you’ll see rewards expressed as an APY, which smooths out the short-term variations.
Staking can take a couple of primary forms, but the most common is pooling. The alternative is running a validation server, which can be complicated and costly. As an example, to run an Ethereum validator requires 32 Ether (ETH) tokens in addition to meeting specific hardware requirements for the server. By contrast, you can stake ETH to a pool without the high barrier to entry.
There may also another staking option, though it will depend on the token. For example, if you’re staking Solana, you have the option of either running a validator, using a staking pool, or delegating to a validator. But for Ethereum, the only options are running a validator or sending your tokens into a staking pool. The difference is that SOL lets you "delegate" your tokens without giving up custody, and ETH does not. As such, you shave to actually send them into a pool and can't just delegate them.
Key elements of staking
While staking is similar to owning a rental property in which you keep the asset, it’s also similar to being a corporate shareholder in which you get a vote. In this case, you’re voting by proxy through a validator.
Here’s a basic anatomy of a crypto network from a staking perspective:
- Validators: These are high-performance servers that host the entire blockchain and which ultimately cast votes on blocks of transactions. A machine hosting the blockchain is also called a node. Validators earn rewards for staked crypto once per epoch, which are then passed on to those who stake their crypto, less a fee. With some cryptocurrencies, you can delegate your stake directly to a validator.
- Pools: A pool is just a group, but each pool may have a different strategy or goal. Some pools use algorithms to determine the best validator to use. Others might spread pooled stakes to as many validators as possible to help the network remain decentralized. When you delegate to a pool, you pay a pool fee as well as a fee to the validators the pool uses.
- Delegator: Because you choose where to stake your crypto, you are the delegator, although pools often perform a secondary level of delegation.
In many cases, crypto investors who choose to stake do so through pools because pools do the work of choosing validators.
Uptime and performance among validators can vary, making the job of choosing a validator tricky at times. Slower validators may be passed over for voting (and consequently rewards), so an unfortunate choice can be costly. If you’re just starting out with staking, a pool may be a safer choice to help ensure stable earnings.
Earning passive income through crypto staking
When staking, you earn rewards at the end of each epoch. These rewards are paid in the same coin or token you staked and are automatically added to your staked amount. With this structure, you earn compound returns allowing you to grow your holdings faster.
For example, if you stake Solana, the current yield from rewards is about 6% APY. If you stake 100 SOL, at the end of the year, you’ll have 106 SOL. The entire 106 SOL remains staked (unless you choose to un-stake your coins), allowing you to earn even more in the future.
And, if you wait for two years, the compound interest will equate to even more returns on your staked tokens. Rather than earning 6% on your 100 staked tokens the second year, you’d earn 6% on 106 tokens, which is the total of the staked tokens and the first year of interest. That equates to earning about 6.36 Solana tokens the second year instead.
Again, you don’t have to wait a year to see the benefits of staking. The amount you have staked will grow beginning with the first time rewards are paid.
While your crypto is staked, you won’t be able to trade the staked coins until you un-stake your coins. Staked crypto is also subject to a lock-up period or bonding period, which can delay your earnings or delay trading and spending.
For instance, SOL uses warmup periods when staking and cooldown periods when un-staking. During warmup periods, only part of your stake will be effective (earning rewards). During cooldown periods, part of the amount you’ve un-staked continues to earn rewards until the cooldown period is complete.
These mechanisms that ease into and out of stake positions help keep the network robust and prevent sudden changes that can affect efficient transactions.
Cryptocurrencies you can stake
The number of cryptocurrencies that support staking continues to grow, with the number of proof-of-stake coins or tokens estimated to be in the hundreds already.
However, the number of viable staking options is far fewer for reasons ranging from illiquidity (infrequent trading) to the long-term viability of the project itself.
Instead, it’s often better to focus on established crypto assets and those that show a promising future.
Among the top choices for staking, you’ll find some household names such as Ethereum, but you’ll also see up-and-coming cryptocurrencies that can provide an opportunity for both price appreciation and passive income through staking.
Some top choices to consider for crypto staking include:
Currently, Ethereum is running proof-of-stake and proof-of-work blockchains in parallel. But eventually, Ethereum will merge the blockchains and validate transactions using only proof-of-stake. That means if you stake Ethereum, you won't be able to use it until well after the merge, which is likely at least one year or more away.
Most non-custodial staking services in which you keep your ETH in your own wallet require a higher staking commitment of 32 ETH or more. It’s important to note that to keep custody of your ETH while staking requires you to run an actual validator, which can be complicated. However, you can also stake ETH through Coinbase or other exchanges if you keep your ETH on the exchange. This structure is known as custodial staking because the exchange has possession of your crypto.
There’s an important caveat to consider before staking Ethereum, though. If you stake Ethereum prior to the merge, you will lose the ability to trade your tokens until after the merge is complete. This could mean your Ethereum is committed for a year or longer. However, an alternative called liquid staking may provide a solution that still gives you access to your tokens in the interim. Learn more about liquid ETH staking in our full review of Lido Finance.
Solana (SOL) uses both proof-of-stake (PoS) and proof-of-history (PoH) to validate transactions on the network. Proof of stake allows a rewards system similar to other cryptocurrencies, while proof of history gives Solana an advantage in both speed and capacity.
You can stake Solana by joining a pool or by running your own validator. You can also delegate directly to a specific validator without using a pool. As the latter requires a significant investment and technical knowledge, most SOL investors choose to stake with a pool.
If you’re looking for a higher return through staking rewards, Avalanche (AVAX) deserves a closer look. The reward APY can be up to 50% higher than with other crypto assets. However, you’ll need at least 25 AVAX to delegate for staking. Alternatively, running a validator node requires 2,000 AVAX.
Similar to Solana, Cardano’s staking ecosystem revolves around pools. With over 1,000 pools for staking as well as options to stake Cardano (ADA) through Coinbase, Binance, and other platforms, investors have plenty of ways to get started.
When you’re ready to put your crypto to work earning passive income, you may have more than one way to do so. Cryptos like Solana make it fairly easy to stake directly from a wallet that supports staking. But you may also have the option to stake through an exchange or another staking platform.
Here are some common choices.
- Wallet-based staking: With wallet-based staking, you delegate to a pool or a validator directly from your crypto wallet. Rewards earned are added to your staked amount.
- Exchanges: Several popular exchanges now offer staking for selected cryptocurrencies. Expect a limited selection. As another caveat, your crypto often must remain on the exchange as opposed to in your private wallet.
- Staking as a Service (STaaS): Staking as a Service platforms promise to simplify the process of staking. Often, you’ll find a wider selection of staking opportunities than available through exchanges.
- DeFi: The mechanics of decentralized finance (DeFi) staking can vary, but the process is similar to other staking methods in that you commit a certain amount of crypto as your stake. However, DeFi staking utilizes smart contracts rather than delegating to a pool or validator.
Staking vs. lending
When researching staking options, you might encounter some opportunities that look a lot like staking but are really lending. You can earn money either way, but the two methods differ in some key aspects.
When staking through a wallet, you keep possession of your crypto. In effect, it’s a lot like leasing. You’ll earn rewards while your crypto remains secure in your wallet.
Lending, on the other hand, usually involves putting your crypto on an exchange rather than securing your crypto in a private wallet. In this case, the exchange lends your crypto to borrowers and charges an interest rate for the loaned crypto. You’ll get a share of the interest collected — paid in the same crypto you’re lending.
With crypto lending, you’ll often find higher yields compared to staking, and those yields can grow larger still if you commit to a longer lending duration. The tradeoff here is that you are giving up custody of your tokens and have counter-party risk if the exchange defaults.
Another key difference between staking and lending is the duration. Staking usually offers the freedom of exiting your stake at any time. By contrast, lending often involves a time commitment.
How much can you earn by staking crypto?
Annual percentage yields vary by crypto type as well as by platform or pool. However, there’s also a supply and demand element to yields. In traditional staking, if the network needs more crypto for validations, yields climb. When the network has more capacity than needed, yields fall.
Many popular cryptocurrencies that are used for staking pay between 3% and 9% APY in rewards. However, some may pay much more, particularly when you choose to lend out your crypto.
Assuming traditional staking, you can see yields of about 5% for Ethereum currently, while Avalanche provides yields of over 9%.
Much like a savings account or bank CD you can roll over, staking lets you leverage compound interest to put more money to work over time. Your interest (paid in rewards) can earn interest of its own (more rewards).
As an example, AVAX trades at just shy of $75 at press time. You’ll need 25 AVAX to start staking. Assuming a 9% APY, an $1,875 investment (25 AVAX) would return $168.75 after 12 months. In the following 12 months, the entire balance of $2043.75 (including 1st-year rewards) can return an additional $183.94 without adding any new tokens to the stake.
Of course, you’ll be paid rewards in the crypto you’ve staked rather than dollars, but dollars offer a convenient way to understand earnings.
How to start staking crypto
For most cryptocurrencies that use proof of stake, the staking process is usually similar.
- Purchase a proof of stake cryptocurrency. If you have a favorite exchange, check there first for your preferred crypto to stake.
- Choose a wallet. Look for a wallet that supports staking. Exodus and Atomic Wallet are both popular choices, as is the browser-based Phantom Wallet. Be sure the wallet you choose allows staking for the crypto you want to stake.
- Transfer your proof of stake cryptocurrency to your wallet. Using your own wallet rather than an exchange offers an additional layer of safety.
- Join a staking pool or stake directly to a validator. Research fees and recent yields to choose the best pool or validator for staking.
- Earn rewards. The stalking rewards you earn are automatically added to your staked amount, allowing you to earn even more with each new round of rewards.
Benefits of staking cryptocurrencies
- Additional earnings: If you’re the buy and hold type or like to keep a core position, staking offers a safe way to earn additional money while you wait for someday. If your plan is to hold some or all of your position, even a small yield may be worth the effort. It’s free money.
- Compound earnings: Because your staking rewards are paid in the same token and automatically added to your staked position, you’ll earn compound interest that can supercharge your returns over time.
- Planet-friendly crypto: Proof-of-stake cryptocurrencies use less energy when compared to proof of work networks. By supporting PoS crypto projects, you’re helping the environment while earning a return as well.
- Robust networks: You’re also helping the network in which you've invested. Proof-of-stake cryptocurrencies need staking to validate transactions. A robust network is better for long-term appreciation of the coins or tokens you own.
Risks of staking cryptocurrencies
Generally, staking is low risk. However, there are some possibilities to consider.
- Ability to trade: Prices can move quickly in the crypto world. When staking, you lose some nimbleness. There’s a cooldown period after un-staking during which some or all of your crypto can't be traded. You also can’t trade crypto that’s still staked. This can be a larger concern with lending which often requires a longer time commitment.
- Earnings can fluctuate: Yields from the pool or validator you choose can vary based on efficiency and how often the server can earn rewards. Slower servers may get passed over for voting and rewards. There’s also a supply and demand element that can affect yield over time. In short, with traditional staking, yields aren't guaranteed.
- Server or pool (bad) behavior: Separate from the risk of reduced yields due to slow servers, there’s also a risk of rogue operators or validators that approve invalid transactions. In this case, a portion of the validator's staked amount may be removed as a penalty in a process called “slashing.”
Other risks to consider include those common to all cryptocurrencies. For example, there’s always a risk of misplacing the keys to your crypto wallet. There’s also a risk of security breaches which can be a concern with online wallets or keeping currencies on an exchange or staking platform.
Is crypto staking the right choice for you?
With potential returns several times higher than those of the highest yielding bank CDs, staking offers a powerful way to put idle money to work. Annual percentage yields of 5% or higher are commonplace for crypto staking, and many coins or tokens can provide even higher returns.
No financial venture is without risk, but you can minimize your exposure by doing your homework first. Research the crypto you plan to stake before making your purchase. If you’re just getting started with staking, consider well-supported projects with an established ecosystem.
If you choose well, you can earn compound returns from staking while also enjoying price appreciation from your investment.
Frequently asked questions
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