Like many things in the world of cryptocurrencies, staking can be a complex or simple concept, depending on the level of understanding you desire. For many traders and investors, the key takeaway is that staking is a way to earn rewards for holding certain cryptocurrencies. But even if you just want to earn staking rewards, it’s useful to at least somewhat understand how and why it works the way it does.
How staking works
If the cryptocurrency you hold allows staking – current options include Tezos, Cosmos, and now Ethereum (through the new ETH2 upgrade) – you can stake some of your holdings and earn a percentage-based reward over time. This typically happens through a “staking pool,” which you can think of as similar to an interest-bearing savings account.
The reason your cryptocurrency can “earn” rewards while staked is that the blockchain puts it to work. Cryptocurrencies that allow staking use a “consensus mechanism” called “proof of stake,” which ensures that all transactions are verified and secured without a bank or payment processor in the middle. Your cryptocurrency, if you choose to stake it, becomes part of that process.
Why only some cryptocurrencies have staking
This is where it starts to get more technical. Bitcoin, for example, does not allow staking. To understand why, you need some background.
Cryptocurrencies are typically decentralized, meaning there is no central authority running operations with them. So how do all the computers in a decentralized network arrive at the correct answer without a central authority like a bank or credit card issuer telling them? They use a consensus mechanism.
Many cryptocurrencies – including Bitcoin and Ethereum 1.0 – use a consensus mechanism called proof of work. Through this, the network dedicates enormous processing power to solving problems such as verifying transactions between people from different parts of the world and ensuring that no one tries to spend the same money twice. Part of the process involves crypto miners around the world competing to be the first to solve a cryptographic puzzle. The winner earns the right to add the latest block of verified transactions to the blockchain and receives a payment in the form of cryptocurrency in return.
For a relatively simple blockchain like Bitcoin, which operates much like a bank ledger by tracking incoming and outgoing transactions, proof of work is a straightforward solution. But for something more complex like Ethereum, which has a vast number of different applications, including an entire world of DeFi running on top of the blockchain, proof of work can become more complicated when there is too much activity. As a result, transaction times can be longer and fees higher.
What is proof of stake
A newer consensus mechanism called proof of stake emerged with the idea of increasing speed and efficiency while reducing fees. The main way proof of stake reduces costs is that it does not require all crypto miners to work on mathematical problems, which is an energy-intensive process. Instead, transactions are validated by people who are invested in the blockchain through staking.
Staking serves a similar function to mining, in that it is the process by which a network participant is selected to add the latest batch of transactions to the blockchain and is rewarded in cryptocurrency in return.
The exact implementations vary from project to project, but essentially users put their tokens at stake for the chance to add a new block to the blockchain in exchange for a reward. Their staked tokens act as a guarantee for the legitimacy of any new transaction they add to the blockchain.
The network selects validators based on the size of their stake and the length of time they have held it. This way, participants with the largest stake are the ones rewarded. If transactions in a new block are found to be invalid, the network can burn a certain amount of a user’s stake, which is known as a slashing event.
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What is proof of stake
So what is this proof of stake thing everyone is talking about? Proof of stake is a consensus mechanism for processing transactions and creating new blocks in a blockchain. In a proof of stake system, validators process transactions and create new blocks in the blockchain, just like miners in a proof of work blockchain (such as Bitcoin). The difference is that nodes (computers participating in building the blockchain), in order to gain the right to create a block, instead of competing to be the first to complete complex mathematical problems as miners do, stake a certain amount of their assets. Then, for each block, a validator is chosen partly at random from among all those who have staked the minimum amount of coins. That validator then creates the block and other validators confirm it. The validator receives a reward for creating a new block in the form of the blockchain’s native coin (e.g. ADA on the Cardano blockchain), but if the block turns out to include a fraudulent transaction, they lose part or all of their stake! (And so does every validator who confirmed it.)
When selecting who will be the next validator to verify a block, the proof of stake algorithm takes into account various factors, including how long the validator has held their stake, how large the stake is, and randomization. This requires far less computing power and electricity than is needed for proof of work miners to earn the right to create a block by being the first to solve a complex mathematical problem. For this reason, proof of stake is a greener and more efficient process than proof of work and often leads to faster transaction confirmation.
Which cryptocurrencies use proof of stake consensus
Not every currency uses proof of stake mechanisms – Bitcoin, for example, operates on a proof of work model. However, there are:
- ADA (Cardano);
- SOL (Solana);
- AVAX (Avalanche).
What are the benefits of staking
Many long-term cryptocurrency investors look at staking as a way to grow their assets by generating rewards, rather than having them collect dust in their crypto wallets.
Staking has the added benefit of contributing to the security and efficiency of the blockchain projects you support. By staking your assets, you make the blockchain more resistant to attacks and strengthen its ability to process transactions. (Some projects also award “governance tokens” to staking participants, giving holders a say in future changes and upgrades to the protocol.)
What are the risks of staking
Staking often requires a lockup or “vesting” period, during which your cryptocurrency cannot be transferred for a set period of time. This can be a drawback, as you will not be able to trade your staked tokens during this period, even if prices change. Before staking, it is important to research the specific staking requirements and rules for each project you wish to participate in.
How to get started with staking
Staking is generally open to anyone who wants to participate. However, becoming a full validator requires a significant minimum investment (ETH2, for example, requires a minimum of 32 ETH), technical knowledge, and a dedicated computer that can run validations day and night without downtime. Participating at this level comes with security considerations and is a serious commitment, as downtime can result in a reduction of the validator’s stake.
But for the vast majority of participants, there is an easier way to get involved. Through an exchange like Coinbase, you can contribute an amount you can afford to a pooled stake. This lowers the barrier to entry and allows investors to start earning rewards without having to manage their own validation hardware. Staking is available to most Coinbase platform customers in the US and many other countries.
How cryptocurrency staking works
There are many ways you can get involved in coin staking. These include staking on a cryptocurrency exchange or joining a staking pool.
Staking on a cryptocurrency exchange
Investing through a cryptocurrency exchange means that you allocate your cryptocurrency through the exchange for use in the proof-of-stake process. In essence, it allows holders to monetize their crypto holdings that would otherwise sit idle in their crypto wallet. With this approach, the exchange does much of the administrative work on your behalf, finding a node you can join so that you don’t have to do it yourself. However, it is not entirely without risk – you must be willing to entrust your coins to the relevant exchange and node.
Joining a staking pool
A staking pool allows stakeholders to earn block rewards by pooling their resources, similar to a mining pool. These pools typically follow a two-tier system, where an administrator oversees the work of validators and ensures smooth operation. When rewards are earned, they are distributed between the pool operator and pool delegates, though some pools additionally charge entry fees and membership fees.
What are the benefits of crypto staking
There are various reasons to stake cryptocurrencies:
- the possibility of high returns (depending on the specific cryptocurrency you stake!);
- the satisfaction of playing a key role in a project you believe in – proof-of-stake currencies simply could not operate smoothly without their stakers;
- you don’t need any equipment to stake.
What are the risks of crypto staking
Staking is not a risk-free practice. You may encounter the following risks in this process:
- the value of staked cryptocurrency is not constant – since crypto prices are often highly volatile, the value of your assets could drop without warning, making it a far less profitable venture;
- some proof-of-stake cryptocurrencies have lock-up periods, meaning you will not be able to access your cryptocurrency for a certain period of time;
- depending on your approach, you may need to entrust your cryptocurrency to an exchange in order to stake it, which can create security risks.
Best crypto staking platforms
When searching for the best crypto staking platforms for 2022, we focused on specific criteria. From an investment perspective, this included metrics such as offered returns, lock-up conditions, and the number of supported tokens.
Regarding security, we investigated whether each platform holds a regulatory license and what systems are in place to ensure that your crypto staking efforts are carried out in a secure environment.
Best staking platforms:
1. Binance – excellent platform with high staking rewards
Binance is one of the best cryptocurrency platforms for those looking to earn high rewards. This popular exchange platform supports nearly 100 different coins for staking, covering a wide spectrum of projects and APYs. In addition, Binance offers various options regarding how long you want to lock up your tokens. This typically covers periods of 10, 30, 60, or 90 days.
To get an idea of what is available, Moonbeam (GLMR) is available for a 10-day lock-up period on the Binance website with an exceptionally high yield of 239%. Shiba Inu and Solana follow, attracting APYs of 8.78% (30 days) and 10.12% (10 days). At Binance exchange, the highest returns are paid out over shorter lock-up periods, as prices change on a daily basis, so you will rarely be able to lock in promotional APYs for more than one month. Additionally, it should be noted that each staking pool has a maximum possible allocation, so the best deals sell out quickly. Once you have eased your staking requirements, you may also consider using the Binance platform for trading digital currencies. After all, the platform offers more than 1,000 markets (60 in the US) with industry-leading prices.
Another top-rated feature offered by Binance is its crypto savings account. When depositing funds, you will earn an interest rate on your idle crypto assets. The specific APY rate you have access to will depend on the cryptocurrency and lock-up conditions. Typically, flexible savings accounts offer the lowest rates.
2. eToro – popular cryptocurrency platform with low fees
eToro is known as an SEC-regulated cryptocurrency broker offering the best commissions in the industry and low minimum account values. However, eToro has created a portal that allows you to stake your inactive cryptocurrency investments. What we really like about this platform is that as soon as you purchase digital assets, the relevant tokens will be automatically staked on your behalf.
At the time of writing, eToro offers automated staking rewards for three crypto assets. These include Ethereum, Cardano, and Tron. As for fees, this will depend on your status on eToro and your location.
eToro is also one of the best crypto staking platforms for 2022 if you want to engage in a flexible arrangement. By this we mean that there is no need to lock your crypto tokens for any period of time. On the contrary, you will continue to earn staking rewards on eligible tokens held in your eToro crypto wallet until you decide to withdraw. This in turn eliminates the need to transfer coins for staking between competing platforms.
If you choose eToro as your primary staking provider, a full range of other benefits is available. For example, you will be staking your crypto assets within a heavily regulated ecosystem, as eToro holds SEC, FCA, ASIC, and CySEC licenses. Additionally, if you want to buy cryptocurrencies on eToro, you can deposit funds in US dollars free of charge via debit/credit card, ACH, bank transfer, or e-wallet.
3. Crypto.com – best crypto staking platform for flexible withdrawals
Crypto.com emerged in 2016 and has since become one of the world’s largest cryptocurrency exchanges – with millions of customers. Although Crypto.com is primarily known for offering simple and low-cost exchange services with over 250 tokens, the platform is also involved in a range of other crypto-focused products.
In addition to digital asset loans, debit cards, and NFT marketplaces, Crypto.com also offers staking services through its Crypto Earn tool. In short, when you deposit selected digital tokens, Crypto.com will allocate funds to provide loans to account holders who wish to borrow capital. The end borrower will subsequently repay the funds with added interest, which you will receive on a daily basis.
How much you are paid depends on three key factors. First and foremost, APY rates will vary depending on the token in question. Stablecoins such as USDC and TrueGBP attract an APY of 12%, while Bitcoin and Ethereum offer 6.5%. Secondly, the specific rates will depend on whether you lock your tokens for one or three months or with no redemption clause.
And finally, if you are able to stake CRO tokens, which is Crypto.com’s native digital asset, you will earn higher APY rates. Regardless of which tokens you choose and under what conditions, you should keep in mind that your tokens can generate interest as Crypto.com lends out the funds.
What is APY
APY refers to the total amount of interest you earn on a deposit account in one year, assuming you do not add or withdraw funds for the entire year. Annual Percentage Yield is expressed as an annual rate. APY includes your interest rate and the frequency of interest compounding, which is the interest you earn on the principal and the interest on your earnings. As you can see, APY incorporates multiple factors that give you a comprehensive insight into your earning potential on your deposit account.
Simply put, the higher the APY, the more you can earn and the faster your bank account balance can grow.
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