Staking Cryptocurrencies: How-To Tutorial
Staking Cryptocurrencies
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.
Disclaimer: We want to emphasize that this is not financial advice. Cryptocurrencies operate in a volatile market, where values can drastically fluctuate in a blink of an eye. It is imperative to conduct thorough research and seek guidance from a qualified financial advisor before investing.
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?
Within the realm of cryptocurrencies, staking assumes a pivotal role as a process that involves entrusting assets to a blockchain network. This commitment serves a crucial function—it facilitates the validation of block transactions. This validation process, contingent on the volume of assets being staked, augments the robustness of the blockchain itself.
The fascinating dynamic at play is that, in exchange for your contribution to enhancing the network's reliability, these blockchain ecosystems extend a gesture of appreciation by rewarding you with additional coins. Effectively, by the simple act of committing your assets and stepping back, you find yourself reaping the rewards of interest accumulation.
The rationale behind this reward mechanism is firmly grounded in the blockchain's utilization of your assets. Cryptocurrencies that embrace staking employ a consensus protocol referred to as Proof of Stake. This mechanism ensures the verification and security of transactions without the necessity of an intermediary like a bank or payment processor. When you decide to stake your cryptocurrency, it seamlessly becomes an integral part of this transaction validation process.
This symbiotic relationship encapsulates the innovative essence of staking, wherein your cryptocurrency assets find purpose beyond mere ownership, engaging actively in the blockchain's operations while you, as a stakeholder, witness your holdings flourish through the steady accrual of rewards.
The Advantages of Staking
Numerous seasoned cryptocurrency holders opt for staking as an avenue to infuse life into their cryptocurrency assets, transforming them from dormant holdings to active generators of rewards. This approach stands in stark contrast to allowing assets to languish passively within wallets.
One of the most compelling attributes of staking lies in its potential to amplify the utility of cryptocurrency holdings. By engaging in staking, long-term holders leverage their assets to generate rewards, thereby infusing vitality into what might have otherwise been static possessions.
Staking doesn't merely benefit individual holders; it yields far-reaching consequences for the efficiency and security of blockchain projects. As coin holders commit a portion of their funds to staking, they inadvertently bolster the network's resilience against malicious attacks. This collective reinforcement, in turn, enhances the network's capability to process transactions with an elevated degree of robustness.
A captivating dimension in the realm of staking pertains to governance tokens, a unique facet that certain projects offer to staking participants. These tokens bestow upon participants a coveted privilege: a voice in the shaping of the protocol's future trajectory. This empowerment enables stakeholders to exert influence over potential changes or upgrades that may be implemented, underscoring the participatory nature and democratized governance inherent in blockchain ecosystems.
Staking transcends the conventional role of cryptocurrency holdings, propelling them from a passive state into an active endeavor, replete with potential rewards and an inherent contribution to the health and growth of blockchain projects.
Some of the Risks of Staking
As in any venture, the presence of risks is an undeniable reality, and staking is no exception.
In the realm of staking, a common facet that introduces a degree of risk is the imposition of a lockup or "vesting" period. During this period, your cryptocurrency holdings become immobilized and are prohibited from being transferred. This situation can potentially present a drawback, particularly when market prices undergo fluctuations that might otherwise have led to trading opportunities. The constraint imposed by the lockup duration can potentially hinder your ability to capitalize on market shifts.
As a prospective staker, conducting thorough research emerges as a paramount prerequisite. Each project harbors its distinct staking requisites and rules, necessitating a meticulous understanding of the associated intricacies. Delving into the specifics of staking requirements for each project is an indispensable step, enabling you to make informed decisions based on comprehensive knowledge.
Staking, while an avenue rife with potential rewards, also brings along its fair share of considerations. Navigating these waters with prudence and due diligence empowers you to navigate the intricacies of staking, optimizing the potential benefits while minimizing potential risks.
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
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
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
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.
Cardano
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.
Polkadot
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.
Staking-as-a-Service
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.
DeFi Staking
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.
