Staking is one of the most popular ways to earn passive cryptocurrency income. It offers crypto enthusiasts a way of putting assets to work, and supporting the functionality of a blockchain network. In exchange, those can earn staking rewards paid in cryptocurrency.
Some people call staking a crypto equivalent to depositing funds to a savings account. When you put money in a savings account, the bank takes that money, and uses it for lending to other people, or for investing in financial instruments. In return, the bank provides you with the interest income after a certain period of time. Although the idea is similar, the staking concept works in a completely different way. Let’s dive into the basics of staking and how it works.
How Does Staking Work?
The term staking refers to the proof of stake (PoS) consensus mechanism, which is a specific protocol used by certain blockchains to select participants who bring value to the network. To participate in consensus, network participants lock a certain number of tokens in the node. Nodes with locked assets can serve as validators of crypto transactions within the network, adding verified transactions in new blocks.
For its contribution to the network, validators receive staking rewards paid in the native cryptocurrency. The bigger the stake, the greater the chances that a particular validator will be selected for a staking reward. To keep validators in check, the protocol can slash validators’ staking rewards, or penalize staked funds for misbehaving actions.
The stake doesn’t usually consist of tokens owned exclusively by validators. In most cases, validators run a staking pool to raise funds from other token holders, and increase the staking power of their nodes. Any holder can participate in staking by delegating their tokens to validators. In return, validators will distribute staking rewards to delegators in proportion to their stake.
The node’s purpose and staking specifics differ from network to network. For example, there are networks where nodes can perform governance purposes, while users can commit their tokens as votes to elect validators who will manage the network.
One way or another, staked coins maintain the network security and operation. Because of that, staking is considered an alternative to mining, where network participants solve complex mathematical equations to keep the network secure.
What Assets Can be Staked?
It’s important to keep in mind that not all crypto networks support staking. Stake-able assets are only those where a blockchain works using PoS or similar consensus mechanisms. For example, Bitcoin is based on the proof of work (PoW) principle, and relies on mining. It means that Bitcoin can’t be staked. However, such networks like Cardano and Cosmos are based on proof of stake, and their native tokens can be used for staking. So the criterion of whether or not an asset is suitable for staking depends on the network, not on the platform that provides staking services.
Some platforms may also provide crypto savings services that users sometimes confuse with staking. Savings services are suitable for different types of digital assets, and they are not obliged to be stake-able. When you think that you “stake Bitcoin”, it’s, in fact, lending Bitcoin to the platform for interest, so the platform can use it to derive income. In this case, crypto savings works similarly to savings accounts in the bank.
Ways to Stake Cryptocurrencies
Exchanges usually serve as a gateway to numerous crypto services, including staking. By staking on the crypto exchange, users can quickly exchange staking rewards for other assets, or benefit from additional features while staking. Typically, users just need to hold cryptocurrencies on their exchange balances to participate in staking.
Users can stake coins in cold wallets, which is also known as cold staking. This form of staking requires users to keep staked coins in the same address while they participate in staking. When stakers move their coins out of cold storage, they stop receiving staking rewards. Users can also connect their wallets with different platforms to delegate tokens to validators.
Staking-as-a-Service (SaaS) Platforms
Unlike crypto exchanges and wallets that may support a broad range of services, SaaS platforms are dedicated to providing only staking options. They enable crypto enthusiasts to stake their assets via third-party staking providers. For this service, SaaS platforms charge a fee — usually a percentage of the staking rewards. SaaS providers are more oriented toward users who want to participate in staking but don’t want to be deeply involved in the staking process.
Steps to Take Before Staking
Choosing What to Stake
Every stake-able asset has its own staking rules. As a result, the staking performance varies depending on what cryptocurrency you stake. It´s important that you do your own research before choosing what to stake since staking is not only about earning rewards, but also about supporting the network. Read whitepapers to understand how staking works for specific networks and how staking participants affect the rewards distribution. As a step further, you can get an idea of the current state of staking for a certain network by looking at:
- blockchain’s token economics and coins emission
- the number of users and stakers
- the total number of coins staked on the network
- the number of coins the validator is staking
- period of time when the validator has been actively staking
Choosing Where to Stake
The staking experience depends significantly on your way of staking. If you just want to earn rewards, and don’t dive deep into the staking process, then you can use a crypto exchange, or platform that provides custodial staking. If you want to be involved in the staking process and manage your funds between different validators and platforms, then you can stake using non-custodial options. Comparing staking annual percentage yield (APY), staking features, as well as reliability of different platforms may help choose the way that fits your needs.
For example, to stake cryptocurrencies with CEX.IO, you just need to hold stake-able assets in your CEX.IO account. While staking, your staked funds are not locked. It allows you to add more stake-able assets and withdraw them anytime. You can also trade staked funds and earn staking rewards simultaneously, without interrupting the staking process. Moreover, CEX.IO features automated balance replenishment. This empowers users to receive staking rewards automatically in their CEX.IO balance, without needing to claim them separately.
To stake cryptocurrency, you need to own a certain number of tokens. Depending on your way of staking and what cryptocurrency you want to stake, there can be different minimum holding requirements. You can use a crypto exchange such as CEX.IO to purchase numerous stake-able assets. Then you can use these tokens to participate in staking with CEX.IO or move them to an external wallet.
How to Stake Cryptocurrencies
Becoming a Validator
To become a validator, you usually need to run a specific node and lock a certain number of tokens. Running a node empowers you to contribute to the blockchain network directly and provide staking services for delegators. However, remaining an eligible validator also requires special technical knowledge, experience, and following a lot of network requirements.
Token delegation requires you to choose a validator you want to stake with. For that, you can visit the crypto project’s website and find the list of validators that support token delegation in its network. In addition, you can find a platform or wallet that provides staking services and allows you to select validators.
After selecting a validator, you can delegate a certain number of tokens and earn staking rewards after the end of the staking period. When you decide to stop participating in staking, you typically need to wait a certain period of time — the unstaking period — to get access to funds and withdraw your staking rewards.
Staking cryptocurrencies with a custodian resembles delegation. Users just need to keep a certain number of tokens on their balances, and custodians will participate in staking on the users’ behalf. At the end of the staking period, custodians distribute staking rewards to their users. In this case, users don’t need to do much to earn staking rewards. Depending on the custodian, users may move their tokens while they participate in staking, or assets remain “locked” until the staking period ends.
Risks and Benefits of Staking
Before you leap into the world of staking, you should consider potential risks that are associated with the staking process.
- Cryptocurrency prices are volatile, and the value of certain tokens may drop over time. Since staking rewards are paid in native tokens, its drop can outweigh the rewards you earn. For this reason, staking can be more optimal for those who plan to hold their assets for the long term.
- Staking rewards may change in different staking periods depending on network status and node performance.
- Most networks and validators feature a lock-up period, meaning users may need to wait a certain period of time before withdrawing their assets from staking.
- If validators misbehave during the staking period, their delegators may receive lower staking rewards at the end of the staking period.
- Cryptocurrency networks and staking providers can be attacked which may affect staking rewards and the security of funds.
However, staking remains one of the most popular ways to earn passive cryptocurrency, and here are some benefits that explain why:
- Low entry — to start staking cryptocurrency, users sometimes need to do a few simple actions, or the whole process may require minimal effort from users. This helps users to earn staking rewards even if they are new to cryptocurrencies and don’t have specific technical knowledge.
- Low minimum holding requirements — in some networks, users can start participating in staking by holding one or a few tokens. However, staking is sometimes considered more efficient with higher stakes.
- Relatively high rewards — there are cryptocurrency networks and platforms that offer higher annual interest yields than many traditional financial services.
- Accumulation — if the crypto prices go up, it increases the value of staked funds and allows you to earn additional income. At the same time, staking cryptocurrencies during bear markets may help accumulate more tokens for the next potential bull market.
- Contribution to the network — stakers bring value to the network, supporting its development. In some networks, stakers can vote for protocol upgrades and provide suggestions for network improvements.
Staking cryptocurrencies opens a lot of new opportunities, empowering users to become a part of decentralized networks and receive rewards for their contributions. Users can start staking without special equipment or technical skills, simplifying network adoption. Moreover, staking is considered a more energy-efficient alternative to mining, and it motivates developers to focus on staking development.
If you want to take advantage of staking, you can visit our Staking page to see what cryptocurrencies are available for staking and start earning staking rewards.
Disclaimer: For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.