Crypto staking is a means of acquiring income passively in the crypto world, analogous to the process of receiving interest or dividends while holding onto the underlying assets.
When staking, one employs their existing holdings to vouch for the accuracy of transactions on an underlying blockchain network, and in return, receives cryptocurrency as a reward. While this may sound complicated, everyday users are often able to partake in staking directly from their digital wallets, whereas some crypto exchanges offer staking programs that deal with technical details, though the regulatory oversight in the U.S. has increasingly scrutinized these arrangements.
In general, staking offers returns that exceed those offered by savings accounts, but it is not without its risks. The reward is paid in crypto, a highly volatile asset that may experience a decrease in value. Furthermore, crypto may have to be locked up for a predetermined period of time, and there is a risk of losing some of the staked cryptocurrency as a penalty if the system does not function as expected.
Nevertheless, staking may provide a means of expanding one’s crypto portfolio through the utilization of assets that are intended to be held for an extended duration. Additionally, staking is an energy-efficient alternative to the mining process employed by Bitcoin and certain other cryptocurrencies.
Crypto staking is a significant element of the technology that powers specific cryptocurrencies, but it is important to note that not all crypto networks utilize staking.
Proof-of-stake (PoS) cryptocurrencies are the ones that tend to support staking. Here are a few examples:
Coin mining for proof-of-work cryptocurrencies requires powerful hardware and a lot of power. The practice of staking is generally not accepted. Types of cryptography that rely on proof-of-work include:
To comprehend the concept of staking, it is imperative to have a rudimentary understanding of the functions of blockchain networks. A few intricacies are highlighted below.
Blockchain networks are “decentralized,” meaning there is no intermediary such as a financial institution to authenticate and ensure the legitimacy of new transactions, matching the historical record upheld by computers across the network. Instead, users merge “blocks” of recent transactions and forward them for inclusion in an immutable historical record. Users who have their blocks approved are compensated a transaction fee in cryptocurrency.
Staking serves as a preventive measure against fraud and errors during this process. Users who propose a new block or vote to approve a proposed block put some of their personal cryptocurrency at stake, which motivates them to adhere to the regulations.
As a general rule, the greater the amount of cryptocurrency at stake, the higher the probability of a user earning transaction fee rewards. However, if the information on a user’s proposed block is deemed inaccurate, they may lose some of their stake – a process commonly known as slashing.
Various options are available for initiating cryptocurrency staking, and the ideal method is dependent on the extent of technical, financial, and research obligations one is willing to undertake.
The initial decision involves choosing between validating transactions through one’s personal computer or delegating cryptocurrency to someone else to do the work on their behalf.
Most networks that support cryptocurrency staking offer the opportunity for token holders to lend them to other users for validating transactions, enabling them to earn a fraction of the rewards.
There are various avenues for staking cryptocurrency, with the level of technical and financial involvement being a key factor in deciding which to use.
One choice is to entrust your tokens to an online service that will handle the staking on your behalf. Some popular cryptocurrency exchanges offer staking services for a fee, and some even allow fiat currency to be used to purchase crypto.
Several cryptocurrency exchanges, including those assessed by NerdWallet, have staking or reward schemes for some crypto assets. However, there may be some disadvantages associated with these programs. Firstly, the exchanges will probably take a cut of your earnings, which you could avoid by staking independently.
Secondly, some firms that have offered staking services on behalf of their customers have run into significant regulatory or financial problems. For instance, BlockFi halted its crypto interest scheme in 2022 following an agreement with the US Securities and Exchange Commission. Several months later, it froze withdrawals due to a liquidity crisis and subsequently filed for bankruptcy.
Gemini Earn, the rewards program offered by Gemini, suspended withdrawals in late 2022 because of issues experienced by a firm running its lending program. The company has claimed that it is working towards reimbursing customers.
Kraken, a crypto exchange, was forced to suspend its staking scheme in February 2023 following an agreement with the SEC, which argued that the program was tantamount to an unregistered securities offering.
Finally, it’s worth noting that third-party crypto staking programs may require you to keep your crypto online, on their platforms. This could leave you vulnerable to potential losses in the event of a crypto exchange failure, similar to the collapse of FTX.
If you prefer to make your own staking decisions, or if you can’t find an exchange that supports the token you want to stake, you can join a “staking pool” operated by another user. To do this, you need to know how to use a crypto wallet to connect your tokens with the validator’s pool.
The official websites of many proof-of-stake blockchains offer information on how to research validators, including links to details about how they operate. Omkar Bhat, data engineering lead at Boston-based analytics firm Flipside Crypto, recommends carefully evaluating a prospective validator’s track record.
You can look for information that is publicly available to see whether a pool operator has ever been penalized for mistakes or malfeasance, and some operators lay out their policies for protecting people who delegate tokens. You can also consider the level of fees or commissions.
Bhat suggests choosing an established pool, but not necessarily the largest one. Since blockchains are supposed to be decentralized, it’s a good idea to prevent any one group from accumulating too much influence. Some people even delegate to validators with lower voting power to increase the decentralization of an ecosystem.
The rewards you can earn through staking depend on various factors like the cryptocurrency, the network’s conditions, and the staking method. However, the rates offered by exchanges can give you an idea of what to expect.
For example, in September 2022, Binance.US estimated an annual yield of 13.5% for its highest-yielding cryptocurrency, ATOM, while Coinbase was offering a 5.75% annual percentage yield for staking Algorand.
To put these rates into perspective, the yields on savings accounts reviewed by NerdWallet are typically around 0.5% APY, and the average interest for US savings accounts is 0.39% APY, according to the Federal Deposit Insurance Corp.
It’s possible that staking isn’t for everyone. Before deciding whether or not to stake your cryptocurrency, there are a few questions you need to ask yourself first.
Crypto staking involves committing assets for a fixed duration, during which liquidation or exchange may not be possible. If you anticipate transferring your cryptocurrency promptly, it is imperative to scrutinize the terms and conditions before staking.
It is paramount to bear in mind that crypto is a capricious asset. Although staking crypto can offer some degree of certainty in investment gains, in the event of a 20% depreciation in the cryptocurrency’s market value during the staking period, for instance, the rewards accrued may appear less appealing.
At its core, the decision to engage in crypto staking may hinge on your level of conviction that it represents a sound long-term investment.
For example, if you have faith in the inherent value of the Ethereum network, the ups and downs of its market value may not sway your inclination to divest your assets. Staking represents one approach to extracting intermediate value from a cryptocurrency investment that you intend to retain.
Crypto staking presents an opportunity to secure passive income that does not entail ongoing effort once the initial investment is made. Nevertheless, although staking might be an excellent alternative for certain crypto holders, there are various other ways to generate passive income that may be worthwhile to explore.
Other prevalent forms of passive income consist of receiving dividends from stock ownership, earning interest on bonds, and generating revenue from real estate. Additionally, there exist non-staking options for earning passive income on your cryptocurrency, such as utilizing lending programs or decentralized finance (DeFi) applications.
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