If you’ve been following cryptocurrency for a while or are a crypto investor, you may have heard about staking. It allows you to earn passive income from the digital currencies you already own. This article will discuss crypto staking, how it works, and how you can stake crypto to earn passive income.
What is Crypto Staking?
There are two ways to stake your cryptocurrency. The first is by staking on an exchange or DeFi platform, and the other is becoming a validator on a Proof of Stake blockchain.
Staking Crypto on an Exchange or DeFi Platform:
By far, the fastest and easiest way to start earning passive income from your crypto is to stake it on an exchange. When you stake on these platforms, you are simply agreeing to deposit a certain amount of cryptocurrency in exchange for earning interest. It’s very similar to making interest from a savings account at a bank. The terms vary depending on what cryptocurrency you are staking and which platform you are staking on. Sometimes there are minimum deposit requirements, and you may need to lock up your cryptocurrency for a specific amount of time.
The key advantages of this type of staking are:
- No special equipment is required.
- No technical knowledge is needed.
- Lower minimum deposit requirements.
- No maintenance costs or time requirements
- When you stake cryptocurrency on an exchange, it doesn’t require constant monitoring or maintenance.
The disadvantages of staking on exchanges
- Lower Interest Rates
- Exchanges work similarly to banks. They make money by investing in your cryptocurrency. They handle all of the research and technical requirements but take part of the interest in return for the services they provide
- No voting Rights
- You forfeit your voting rights to the exchange.
- Less Security and control over your crypto
- You lose some control over your coins since you are trusting the exchange to keep them safe. Additionally, most exchanges only offer a limited selection of coins for staking.
Becoming a Validator on a Proof of Stake Blockchain:
This process includes committing your crypto-based assets to support a blockchain network and confirming transactions. This method of staking crypto is available with cryptocurrencies that utilize a proof-of-stake (PoS) consensus mechanism.
What is Proof of Stake (PoS)?
Proof of stake is an algorithm that enables people to validate block transactions according to how many coins they hold. This algorithm is an energy-efficient alternative to proof-of-work (PoW). The PoW algorithm utilizes complex mathematical problems to validate transactions and add new blocks. It requires powerful computers and lots of energy to solve these equations. Bitcoin (BTC) uses this algorithm.
With PoS, resource-intensive hardware is unnecessary since transactions are validated based on the collateral staked.
If a validator node tries to falsify a transaction, other validators immediately expose the fraud. Then the validator would be forced to forfeit the cryptocurrency they have staked, as a penalty.
How does Staking Work on Validator Nodes?
When someone wants to earn staking rewards, they need to deposit a certain amount of currency for a certain amount of time. The specific terms for staking vary across platforms.
The validator nodes on the network then use an algorithm to decide which pending transactions they should verify. The validator who verifies the transaction receives a reward.
The key advantages of this type of staking are:
- Higher Interest Rates
- You Get the Power to Vote on Decisions.
- When you stake a cryptocurrency, it gives you the right to vote on critical decisions made by the developers. This is important since it gives you a say in how your investment grows.
- Increased Security
- Since stakeholders are responsible for validating transactions, they are vested in keeping the network secure. This helps to make proof-of-stake cryptos much more secure than their proof-of-work counterparts.
The disadvantages of staking nodes:
- Hardware requirements/investment
- Equipment maintenance time and cost
- Technical knowledge
- Higher Staking Minimums
How to Stake Cryptocurrency on an Exchange?
Now that we know what staking is and how it works, let’s look at how you can stake crypto and earn passive income.
- Choose a platform: In this example, we will use Crypto.com.
- Go to your home screen and select “Earn.”
- Locate the Plus (+) sign to add crypto for staking. A list of crypto will pop up for you to select. Click the crypto to see the APY.
- Next, select the crypto you want to stake and choose one of the terms they offer; flexible, one month, or three months.
- After deciding on the term, you’ll need to agree to their terms and conditions. And that’s it! You are now earning passive income. Note; your crypto will be moved out of your crypto wallet and into the Earn section of the Crypto.com APP.
How to Stake cryptocurrency using a Node?
The process of staking cryptocurrencies can be overwhelming for beginners. However, it is pretty simple once you get the hang of it. Here is how you can stake cryptocurrencies to generate passive income every single month:
Step 1: Choose a cryptocurrency that uses Proof of Stake.
As a crypto investor, you should know that all cryptocurrencies do not offer staking. You need a cryptocurrency that uses proof-of-stake (PoS) to validate transactions. There are many great options available, such as Tezos (XTZ), Cosmos (ATOM), Dash (DASH), etc.
However, below are a few of the major currencies.
- Cardano – offers a great return on investment, with staking rewards of up to 5% per year.
- Ethereum – through various staking platforms with up to 10% annual returns. It is also one of the first coins with a programmable blockchain.
- Tezos – is one of the most popular staking coins, with rewards of up to 6% per annum.
- Solana – The Solana blockchain can process up to 50,000 transactions per second and offer low gas fees. They offer around 5% APY for staking SOL.
- Polkadot – staking rewards are handsome, with up to 12% per annum returns.
You should not just invest. Before choosing, take the time to learn about proof-of-stake cryptocurrencies and how they could be used as investments. Learn how they work and stake, the stake rewards, and other important information.
After that, use an app like Binance or another top staking platform to buy the cryptocurrency you want.
Step 2: Get a digital wallet that supports the cryptocurrency you want to use.
Next, you need a digital or cold storage wallet that supports the cryptocurrency you want to stake. Some popular options for digital wallets are Trust Wallet, Atomic Wallet, and Exodus. The Ledger Nano S and Trezor Model T are great options if you want a cold storage option.
Once you have deposited your coins into the wallet, they will start getting staked automatically and earning rewards. The frequency and amount of rewards depending on the cryptocurrency you choose. For instance, Tezos pays rewards once every three days, while Polkadot pays them daily.
Step 3: Create a Staking Pool
While staking your cryptocurrency has its benefits, it can also be risky. The biggest downside is that you could lose everything if your computer crashes or the power goes out.
To mitigate this risk, you can join a staking pool. When you stake through a pool, your coins are combined with those of other investors and spread across multiple nodes. Even if one node fails, the others will keep the network running smoothly.
Additionally, staking pools also offer higher returns than individual stakes since they tend to have more resources at their disposal. For example, Stakecube gives returns of up to 12% per annum on some cryptocurrencies.
While searching for stake pools, make sure to look for the following things:
- Reasonable fees: Most pools charge a small percentage of the rewards as a fee.
- Payout Schedule: Some pools offer more frequent payouts than others.
- Balance Requirement: Some pools have a minimum balance requirement. Choose one that meets your needs.
Joining a staking pool is a great way to reduce risk and earn higher rewards. However, make sure to do your due diligence before selecting one.
Staking your cryptocurrency is an excellent way of earning passive income, gaining voting rights, and having more input into the success of your investment. You can either go it alone or join a stake pool. However, it is essential to know the risks involved before investing. Do your homework and only stake what you can afford to lose!