When it comes to cryptocurrency, buying and selling coins is only one way to make money. You can also earn passive income through staking crypto.
Let’s take a look at how staking works, some of the coins that can be used for staking, what the pros and cons are, and how you can get started staking crypto.
How Staking in Crypto Works
In a nutshell, crypto staking works similarly to an interest-earning savings account found in traditional banking. In centralized finance, banks use the money you deposit for funding a variety of investments. In return, you receive interest payments.
In crypto staking, you deposit your crypto assets, which are then used to validate transactions on the blockchain network in a consensus mechanism known as proof of stake. The length of deposit will vary. It’s possible to get flexible term deposits, but you’ll usually find that fixed-term deposits come with greater return on investment.
By depositing your digital assets, you’re contributing to the ecosystem health of proof of stake blockchains. In return, you’ll be rewarded every time your staked assets are used to create a new block. The more you invest and the longer you keep staking your coins, the more you’ll be rewarded.
For example, looking at Wizardia tokens (WZRD), there are three different staking periods: 4 months, 8 months, and 12 months. Staking coins for 4 months will get you a 31% APY, but staking coins for 12 months will net a 114% APY.
WZRD also offers an additional staking reward. Crypto investors with this particular digital asset also have the chance to win extra prizes like non-fungible tokens (NFTs) that can also be used for gameplay.
Now that you understand the general concept behind crypto staking and how you can earn staking rewards, let’s take a closer look at the proof of stake model and how it works.
What Is the Proof of Stake Model?
The proof of stake consensus mechanism was designed in 2012 as a way to speed up the process of validating transactions on a blockchain network.
How it works is users deposit a set amount of their crypto holdings to be used to validate transactions in a similar way to cryptocurrency mining. Deposits can be made through a DeFi staking service, a cryptocurrency exchange, or possibly even on a project’s dedicated platform, depending on the given coin.
Blockchain projects can vary depending on the network, but usually one of the investors is chosen to complete the last part of a transaction, creating a new block that is added to the blockchain.
Once new blocks are added, participants earn rewards in the form of native tokens, NTFs, or both. The staked crypto is used as a guarantee that the transaction is legitimate, which strengthens the network.
Earning staking rewards is easier the more you have invested. Most networks favor investors who have a high number of staked tokens or who stake cryptocurrency for long periods of time.
That doesn’t mean the blockchain is dominated by older nodes, though. Proof of stake uses the concept of coin age for nodes, which is calculated by multiplying the number of coins staked by the number of days they have been staked. If a node forges a block, its coin age is automatically reset to zero.
One caveat for proof of stake is that not all cryptocurrencies allow staking. For example, Bitcoin is a notable exception that solely uses a different consensus mechanism called proof of work. Bitcoin applications are fairly straightforward, so it makes sense for it to scale using proof of work instead of proof of stake.
Other blockchain networks have more complicated applications. While not all of them allow crypto staking, many do in order to simplify the transaction process. Some of the coins that do allow staking include Wizardia, NEAR Protocol, and Ankr.
Wizardia (WZRD)
The WZRD token is the core utility token of the play to earn (P2E) online role-playing strategy game Wizardia. It’s designed to be used as both the in-game currency and the currency of the future Wizardia metaverse.
The cross-chain token was minted on Solana (SOL) and trades on Binance Smart Chain (BSC). A total of 300 million tokens were minted during the Token Generation Event (TGE) and will be split across several rounds, events, and teams, with 120 million tokens reserved for the P2E reward pool and staking.
Staking Wizardia tokens comes with up to 114% APY.
NEAR Protocol (NEAR)
NEAR Protocol is a layer-one blockchain that aims to provide a secure network to developers with decentralized application systems (dApps). The Nightshade algorithm used by NEAR Protocol allows transaction validation using parallel processes.
NEAR Protocol estimates that its system will reduce transaction fees for users by 1000x, with developers who use the network getting 30% of transaction fees.
Staking NEAR tokens could come with up to 21.80% APY.
Image source: blog.bitnovo.com
Ankr (ANKR)
Ankr is a layer-one blockchain that provides an ecosystem where developers can build and maintain decentralized applications. It is entirely proof of stake backed and is dependent on an extensive network of validation providers
The Ankr native token pays for its premium and transaction fees. Transaction validators earning staking rewards can use their funds to invest in Ethereum (ETH) tokens through an artificial investment called anETHc.
Ankr claims that staking tokens comes with a 4% APY.
Proof of Stake Model vs Proof of Work Model
Proof of work is another consensus mechanism that can be used when validating transactions on blockchain networks. The proof of work model is the basis for another way to earn passive income through crypto, which is mining.
Crypto mining allows blockchain actors to verify transactions through complex cryptographic puzzles. The first actor to complete the puzzle is the one who earns the reward, which is the blockchain network’s native token plus a transaction fee.
It’s worth noting that this model highly favors those with greater computing power, because they’re able to process transactions faster.
The proof of stake system is far less resource intensive than the proof of work model. The machinery needed to stake crypto is less expensive and complicated, and it doesn’t require excessive computing power to work.
One of the biggest differences between the two is that mining has a higher barrier to entry and requires technical knowledge, whereas staking is accessible to entry-level crypto investors.
What Are the Benefits of Staking Crypto?
The major benefit of crypto staking is the ability to earn rewards for doing nothing more than depositing your coins. It allows your tokens to work for you instead of sitting in a dusty crypto wallet.
It also contributes to the network security of your tokens, helping to strengthen it against future attacks and improving its ability to process transactions. In short, staking increases the health of a network’s ecosystem.
The staking process is also more ecologically sound than traditional mining. In fact, a 2021 study from University College London showed that the highest consuming staking system used 1,000 times less energy than Bitcoin’s proof of work system.
Finally, anyone can get started with staking cryptocurrencies. There is no special skills or advanced equipment required to take part in staking opportunities.
What Are the Risks of Staking Crypto?
Crypto staking can be a great way to earn interest on your cryptocurrency holdings, but it does come with some risks.
One of the biggest risks of staking is that you could end up validating a fraudulent transaction. If that happens, you’ll receive a slashing penalty. Not only would you lose part of your staked assets but you would also lose your ability to participate in future staking opportunities.
A secure crypto platform will take steps limiting the possibility of fraudulent transactions. But it is possible for a node to get a majority share in a network, known as a 51% attack, take control, and approve fraudulent transactions, which could jeopardize your own investment.
Some native tokens require large investments before you can stake your crypto. One way around this is to look for staking pools in the cryptocurrency you want to stake. Staking pools allow multiple investors to pool their resources together to meet the minimum amount needed to stake crypto effectively. A single pool operator manages the fund, and all coins are held in a single wallet.
The downside to using a staking pool is that the potential rewards are much lower than they would be if you were staking on your own.
How to Start Staking Crypto
If you want to stake crypto, the first thing to do is purchase native tokens on an exchange. Smaller coins might not be available on larger exchanges, so you’ll need to be comfortable using a crypto wallet and transferring funds from one exchange to the next.
If you plan to become a full validator, you’ll need to invest in computer equipment that has at least 250GB of storage and 8GB of RAM. Depending on the coin you’re staking, there might also be minimum investment requirements.
Take Ethereum (ETH) for example. In order to become a solo validator, you have to stake a minimum of 32 ETH. For the average crypto investor, that’s an unattainable amount. But on the flip side, there are plenty of blockchain currencies with much lower requirements.
Let’s say you can’t afford the minimum investment to become a full validator. Look into a staking pool that will let you contribute what you can afford. Using a staking pool is a great way to get your feet wet with crypto staking.
Most staking pools have a single manager who keeps both the nodes and the validators operational. A staking pool will still allow you to reap the rewards of staking crypto without the need for technical knowledge and computer equipment full validators need.
Some things to consider when choosing a staking pool:
- Find one that is being run by a professional operator. You want to feel secure with the person managing your money.
- Look for transparency. The more transparent your pool operator is about their security measures and how they plan to manage nodes and validators.
- Ask about updates. How will stakeholders get updated by the manager? How often can they expect updates? You need a responsive manager who will keep you in the loop.
- Check the fees. Some pool operators charge stakeholders a service fee. While this isn’t a dealbreaker (or uncommon), you should know about all fees upfront.
FAQs
Is crypto staking worth it?
Staking cryptocurrency can be lucrative and an easy way to generate passive income. There are risks associated with it, though, so you’ll need to understand exactly what you’re investing in before you take the leap. As with all financial products, you should get investment advice from a qualified professional before investing.
What is staking crypto and how does it work?
Staking cryptocurrency involves placing your cryptocurrency assets on blockchain networks and confirming transactions. It is only supported in crypto currencies that use proof of stake for payment processing. It was designed to be an energy-saving solution to the original proof of work system.
Can you make money by staking crypto?
Cryptostaking has strong potential to yield large profits. Each token has its own average APY, so returns will vary. The more you invest in a specific coin and the longer you stake your investment, the larger your potential reward will be.
What does staking in crypto mean?
In cryptocurrency, staking offers coin holders the possibility of using their cryptocurrency to earn money without selling it. Staked coins are used to verify blockchain transactions and as leverage to guarantee transaction legitimacy.
Michelle Lindner
Michelle is an experienced digital marketer whose jam is creating value-driven content that engages and converts. When she's not crafting killer copy, she's hanging with her goats and chickens.
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