If you are interested in passive income on cryptocurrencies, you should know what staking is. Many investors use this method as an additional source of income. By analogy with interest on deposits in traditional currency, you can earn income by holding cryptocurrency.
This article will analyze what types of staking exist and how to make money on it.
What is staking in cryptocurrency?
For the blockchain to work, network users must store their coins on a unique algorithm – Proof of Stake (PoS). For such storage, they receive a reward. This is called staking. From the user’s point of view, staking is like a bank deposit. You store your funds in a specific location and receive a percentage of your income.
There are several ways to initiate staking.
– Transfer your coins to the so-called validators – network node operators. This is the simplest method and is suitable for beginners.
– Create your node and become a validator. To do this, you need to have an impressive amount on your account (it has its own for each token) and be quite technically savvy. This method is considered more reliable and highly profitable.
– To explain what staking in cryptocurrency is, in simple terms, let’s look at two standard algorithms for creating crypto assets.
Proof-of-stake and Proof-of-work algorithms – what are they?
The Proof-of-stake algorithm (literally “proof of stake”) goes like this:
– The network analyzes user assets.
– The right to record data on transactions in the blockchain is given to the one who has more coins. This person’s tokens are frozen and work to create new blockchain blocks.
– As a reward, the user whose equipment was used receives the network’s cryptocurrency.
– The whole process happens automatically without user intervention.
– The meaning of this algorithm is to maintain the health of the blockchain without significant computing power.
Another mining algorithm is Proof-of-work (“proof of work”).
In this case, the user connects computing equipment to the network for mining. Earnings, in this case, depend on the amount of power you click. Bitcoin works on this algorithm.
All cryptocurrencies work on one of the listed algorithms. The Proof-of-work algorithm is considered less environmentally friendly because it requires many competing devices to work simultaneously. In this regard, many modern crypto projects are switching to Proof-of-stake.
Pros and Cons of Staking Cryptocurrency
Staking is similar to bank deposits and has identical advantages:
– It’s passive income. You don’t put in any effort; store your coins and earn a percentage.
To earn money, it is not necessary to understand in detail what staking is and how it is technically arranged. Even an inexperienced user will cope.
– When staking on an exchange, you can choose a plan with a guaranteed percentage, that is, get a small profit even if the price of the coin itself falls.
Now for the disadvantages:
– For staking, you need to place coins in a wallet connected to the Internet 24/7.
– Profitability of staking is low. The transaction reward is divided between all participants in proportion to their contribution.
– To get a noticeable income, you need a severe amount of coins. The more cryptocurrency you store, the higher the earnings.
How to Stake Cryptocurrency?
For classic staking, the process is as follows.
Choose a cryptocurrency that supports staking. Their lists are on cryptocurrency portals, for example, here.
When choosing, the asset’s profitability plays a role, as well as the minimum number of coins required to become a validator. Each token has its own “entry threshold” – for example, for Ethereum, it is 32 ETH or approximately 107,400 USD (at the exchange rate on the day the article was published). It is based on your available budget.
Read the guide for the selected token and create a wallet. We have already written about the types of wallets earlier. Set up wallet connection to staking.
Buy the selected cryptocurrency on the exchange or in the exchanger.
Keep your computer turned on and connected to the internet; validators can be fined for disconnecting from the network.
An easier option is to entrust your coins to an intermediary, such as an exchange.
What is cryptocurrency staking on an exchange?
Crypto exchanges often act as large validators by creating nodes (nodes that include transactions in a block). It is enough for users to place their funds on the exchange account. You can do this in the appropriate section of the website of the site of interest.
Exchanges can offer fixed plans for staking: a certain number of days with a guaranteed return. So, in the corresponding section of Binance, you can choose plans for 30, 60, or 90 days. It is enough to sеlect a token for staking from the list, click on the placement period of interest and enter the amount. The money will be debited from your exchange wallet and, at the end of the term, will be returned. The interest earned will also be credited to your wallet in the same cryptocurrency.
Binance Fixed Staking Form
Defi Staking (from DEcentralised FInance – decentralized finance) is a more risky option. Defi is a blockchain-based financial service controlled by smart contracts. If in fixed staking, you receive a reward from the blockchain in which your money is involved, then in Defi, you transfer coins to different counterparties and services that use them.
The advantages of Defi staking include potentially higher returns (for fixed staking, it rarely exceeds 10%). In addition, interest will be accrued daily and can be reinvested.
It is essential that such cryptocurrency staking can be with a fixed or floating rate. In the first case, you place your funds for a predetermined period and take the profit. The floating rate depends on the state of the market and allows you to withdraw money at any time. It is suitable for those who are ready to monitor rate fluctuations constantly to be in time, if anything, to close the position on time.
The risk is that the exchange is only a platform that hosts Defi offers and does not guarantee you a profit or loss. No one will compensate you for your losses if you lose money in a downtrend.
To date, most major exchanges provide staking opportunities: Coinbase, Kraken, KuCoin, Binance, and others.
Staking via SaaS services
In addition to exchanges, you can stake through the so-called SaaS platforms (Staking as a service – betting as a service). This is a kind of pool where people pool their crypto holdings to increase their chances of being a validator. All that such cryptocurrency staking requires from the user is registered on the service and delegation of their funds to the platform. The income you will receive from this is proportional to the value of the contribution.
Popular SaaS sites today: Figment Networks, MyContainer, Stake Capital, Stake.Fish and others.
What other staking options are there?
In addition to staking through exchanges or SaaS platforms, you can connect a cold wallet to a validator and earn money on it. Popular Ledger or Trezor hardware wallets support this option. Some hot wallets also allow staking. These include, for example, Atomic or Trust. When opening a cryptocurrency wallet, check out the features it supports. Such an option as cryptocurrency staking may be included in this list.
Summary
In this article, we briefly discussed what cryptocurrency staking is. Simply put, it can be called an analog of a bank deposit in the cryptocurrency market.
In general, the stacking scheme is as follows:
You provide your tokens for storage to the validator.
It connects them to the blockchain to form new blocks of transactions.
You receive remuneration in proportion to the invested funds.
Staking is one of the ways to “extract” cryptocurrency along with mining.
Any tokens operating on the PoS (Proof-of-stake) algorithm are available for staking.
To stake, you can connect to the network and become a validator – this requires some technical knowledge and many coins in the account.
Users often provide their coins to other validators, receiving a share of their income in return. Both cryptocurrency exchanges and specialized SaaS services can act as validators.
Many cryptocurrency wallets, both cold (hardware) and hot (online) can be directly connected to the blockchain for staking.
