Before starting staking cryptocurrencies, users need to define what staking approach they want to choose — custodial or non-custodial. Let’s dive into the pros and cons of both approaches.
Custodial staking
First off, we need to understand what “custodial” means. Custodial staking is the process when a certain custodian — a third party that has physical possession of users’ financial assets — stakes coins on the users’ behalf. In traditional finance, banks and brokerages usually act as custodians. In the crypto market, there are crypto exchanges, and staking providers which offer custodial staking.
Staking cryptocurrencies with a custodian looks like a delegation. The custodian stakes users’ assets, and then distributes staking rewards at the end of the staking period, skimming a certain percentage for its service. A custodian selects validators for staking, or stakes coins on its node.
The main advantage of custodial staking is that it is the simplest path to benefit from staking cryptocurrencies. Usually, custodians offer ready-to-go service where you don’t need to do much to earn staking rewards. It makes the staking process ideal for users who don’t trust themselves, don’t have too much knowledge of the staking process, or want to earn passive income without too much effort.
Moreover, if you stake cryptocurrencies with a crypto exchange, you can get access to additional features. For example, some custodians allow users to stake coins with no lock period, offering withdrawal without needing to wait when staked coins return to the wallet from the staking node. In addition, there’s no need to offload tokens to another service once you need to exchange staked coins or earned staking rewards. You can do it all at once with a crypto exchange that offers custodial staking. This means custodial staking is more about convenience.
However, custodial staking requires you to trust custodians since they own private keys, and distribute staking rewards. Custodians may also set certain rules, and limitations for users who use their service. When users stake coins with the custodian, they can only earn staking rewards defined by the custodian.
Non-custodial staking
If you don’t want to rely on third parties, then you can take one of the non-custodial ways for staking. Non-custodial staking largely takes two forms: running a node, or delegating crypto to validators.
Running a node allows you to contribute to the blockchain network directly, and become a validator. Validators earn the highest possible staking rewards, and may set their own commissions for providing services to delegators. However, this approach usually requires a significant number of tokens for the start, specific technical knowledge, and a lot of effort to remain a proper validator.
Token delegation to validators is a much easier option to stake assets. Delegators can choose the validator they want to stake with, or manage assets between different validators. But it is important to keep in mind that not validators are equal. They have different fees for their service, and have a different reputation. Validators that misbehave more frequently than others may show worse performance, putting delegators’ assets at risk of slashing or providing lower staking rewards. That is why delegators should do their own research before choosing a validator. In this case, your own strategy and analysis determine what staking rewards you will earn.
Conclusion
Custodial and non-custodial staking are very popular options to gain passive income in the crypto market, and there is no best way among them. For most users, choosing between custodial and non-custodial staking is a trade-off between trust and convenience. Custodial staking can be more convenient but requires you to trust custodians. Non-custodial staking allows you to trust third parties less but requires more effort into the staking process. Users can also combine custodial and non-custodial staking, choosing different ways for different cryptocurrency networks.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.
