Staking Cryptocurrencies: How-To Tutorial
Staking Cryptocurrencies: How-To Tutorial
Cryptocurrency investors have a wide range of options that they can utilize to earn a return on their holdings. These options include pooling, mining, trading, hodling, and staking. Staking is popular among cryptocurrency investors as it allows them to earn a good return with relative ease. To get started, all an investor has to do is allocate the cryptocurrency that they want to stake towards a staking address. In this article, we will take a look at what staking cryptocurrencies is in more detail, how it works, and some of the most popular coins for staking.
What is Proof of Stake?
Before we start exploring all things related to staking, it is important that we take a look at what Proof of Stake actually is.
Proof of Stake is a blockchain consensus mechanism that reduces the amount of computational work needed to verify blocks and transactions that are written to the blockchain. Compared to Proof of Work, which was the first consensus mechanism used in a blockchain network, Proof of Stake changes the way blocks of transactions are verified on the network using the machines of coin owners. The owners offer their coins as collateral for the chance to validate blocks. These coin owners then become known as “validators” in the network.
Proof of Stake Origins
The earliest presence of Proof of Stake dates back to a 2012 technical paper for Peercoin, when Sunny King and Scott Nadal detailed how the then new consensus mechanism would work. The Peercoin network was launched using a hybrid consensus model that combined Proof of Stake with Proof of Work, and mainly used Proof of Work to mint the initial supply. However, most of the Peercoin network relied on the Proof of Stake model.
What is Staking?
In crypto, staking is the process of committing assets to a blockchain network. By committing assets, you allow block transactions to be validated. The more staking occurs, the more robust a blockchain becomes.
So, in exchange for improving their reliability, networks are willing to reward you with more coins for staking, thus earning you interest for basically just hitting a button and walking away.
The reason your crypto earns rewards while staked is because the blockchain puts it to work. Cryptocurrencies that allow staking use a consensus mechanism called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.
The Advantages of Staking
There are many long-term cryptocurrency holders that prefer staking as a way of making their cryptocurrency assets work for them and generate rewards, rather than their assets just collecting dust in their wallets.
Another benefit when it comes to staking is that it contributes to the efficiency and security of blockchain projects. By coin holders staking some of their funds, they make the network more resistant to attacks. Therefore, strengthening the network’s ability to process transactions. Some projects also award special tokens called governance tokens to staking participants. These governance tokens give the participant a say in any future changes or upgrades that will be made to the protocol.
Some of the Risks of Staking
As with all things, there are always risks. This is no different when it comes to staking.
Staking often requires a lockup or “vesting” period, where your crypto can’t be transferred for a certain period of time. This can be a possible drawback, as you won’t be able to trade staked tokens during this period even if prices shift. Before staking, it is important to research the specific staking requirements and rules for each project you are looking to get involved with.
Cryptocurrencies That Can Be Staked
Most often, you can stake any cryptocurrency that implements Proof of Stake. For example, Bitcoin implements a Proof of Work consensus mechanism, so you won’t be able to stake on Bitcoin.
On the other hand, Ethereum currently uses a hybrid consensus model that combines both Proof of Stake and Proof of Work. This is likely to change soon as Ethereum plans on transitioning to a full Proof of Stake model with Ethereum 2.0.
Here are some popular cryptocurrencies that you can stake:
Ethereum is the first programmable blockchain, and gives developers a virtual machine to build decentralized applications on. Ethereum currently allows staking with returns as high as 17 percent. However, to start staking Ethereum, you need at least 32 ETH to qualify. With this being said, it may be better to look into platforms like Aave and Polygon, which are built on the second Layer of Ethereum. Polygon and Aave enable staking of their tokens with no minimum amount requirement.
Staking MATIC (Polygon) and AAVE is an easy but effective way to earn interest on your ETH-universe funds. These platforms give you a quick method to exchange your ETH for Layer 2 tokens, earn interest, and bring it back to Layer 1 in minutes.
Tezos is another blockchain that incorporates Proof of Stake, and is known for its energy efficiency when compared to Bitcoin’s Proof of Work consensus model. Tezos has also proven its reliability over the years and there are a lot of new projects launching on their network. Platforms such as Everstake allow you to achieve solid returns on your staked Tezos.
Solana is Ethereum’s scalable competitor and has several wallets that support staking. You can use wallets such as phantom.app and solflare.com. You can earn up to 6.35% APR staking SOL.
Staking Cardano is somewhat similar to a traditional savings account as holders can stake assets at the click of a button and can expect positive long-term results. Even after staking, you can move your ADA freely and take it out of staking completely if you’d prefer.
Staking on Polkadot requires a minimum of 120 DOT and they have a set maximum of 22,500 nominators. You can not transfer your tokens on Polkadot while they are bonded. The current annual yield on Polkadot is around 10%, according to Ledger.
Now that we have taken a look at some of the cryptocurrencies that you can stake, let’s take a look at ways you can get started staking.
Ways to Stake
Through an Exchange
Cryptocurrency exchanges can be used to stake cryptocurrencies. One thing to remember is that when staking cryptocurrency on an exchange, you do not actually hold the cryptocurrency to earn rewards for staking. Instead, you are providing liquidity for the exchange to stake on your behalf. A popular example is Coinbase.
Using a Cryptocurrency Wallet
Some cryptocurrency wallets also include staking functionality. LedgerLive is one of the most popular choices for users looking to stake cryptocurrency directly from their web3 wallet.
If you are worried about losing your funds due to price drops then you can make use of a staking service provider that will closely monitor your funds around the clock to avoid the doomsday scenario.
As mentioned previously, Layer 2 Ethereum DeFi protocols such as Aave simplify the staking process for you. There is a long list of DeFi platform options that you can stake on.
Similar to an exchange, you lend your cryptocurrency when staking on a DeFi platform. The most secure way to stake an asset is directly on a cold-chain wallet. However, DeFi protocols are popular because of how easy it is to stake on them.
Calculating Staking Rewards
Every blockchain calculates staking differently. Some take into account several factors and adjust their rewards on a block-by-block basis. These factors usually include the number of coins the validator is staking, how long the validator has been actively staking, and the total number of coins staked on the network, for example.
Staking rewards might also be calculated and represented as a fixed percentage. These rewards are distributed between validators as a type of compensation for inflation, which is the process of encouraging users to spend their coins instead of just holding them. The goal behind this is to increase the usage of cryptocurrency. This staking model allows validators to calculate the exact staking reward that they should expect.
Staking Cryptocurrencies: Conclusion
Staking is a popular way for cryptocurrency investors to put their holdings to work instead of letting them collect dust in their cryptocurrency wallets. Different projects offer different annual returns, and some staking options, such as Ethereum, may require that a minimum amount of the cryptocurrency be staked before you can begin. Some of the most popular cryptocurrencies to stake include Ethereum, AAVE, Tezos, Cardano, Solana, Polkadot and Polygon. Staking can be performed with any blockchains that support the Proof of Stake consensus model. There are also several methods to choose from when staking, including cryptocurrency exchanges, wallets, DeFi protocols, and staking service providers. By taking part in staking, you make the network more secure. One major risk with staking is that it often requires a lockup or “vesting” period, where your crypto can’t be transferred for a certain period of time. This can be a drawback, as you won’t be able to trade staked tokens during this period even if prices shift. However, if you’re not planning on using your crypto for a while then staking is a very attractive option for moderate to high annual returns.
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